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) September 30, December 31, 2022 2021 ASSETS Cash and cash equivalents $ 12,944 $ 29,928 Restricted cash and equivalents 159,762 146,620 Finance receivables measured at fair value 2,343,253 1,749,098 Finance receivables 117,686 232,390 Less: Allowance for finance credit losses ( 27,996 ) ( 56,206 ) Finance receivables, net 89,690 176,184 Furniture and equipment, net 1,700 1,129 Deferred tax assets, net 14,570 19,575 Accrued interest receivable 776 2,269 Other assets 27,829 34,775 Total Assets $ 2,650,524 $ 2,159,578 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Accounts payable and accrued expenses $ 55,982 $ 43,648 Warehouse lines of credit 242,449 105,610 Residual interest financing 49,560 53,682 Securitization trust debt 2,057,100 1,759,972 Subordinated renewable notes 27,249 26,459 Total liabilities 2,432,340 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; 20,607,286 and 21,143,764 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively 31,427 55,298 Retained earnings 188,379 116,531 Accumulated other comprehensive loss ( 1,622 ) ( 1,622 ) Total stockholders’ equity 218,184 170,207 Total liability and stockholder’ equity $ 2,650,524 $ 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 Nine Months Ended September 30, September 30, 2022 2021 2022 2021 Revenues: Interest income $ 79,817 $ 67,018 $ 225,547 $ 198,551 Mark to finance receivables measured at fair value 8,183 – 15,283 ( 4,417 ) Other income 2,305 1,547 5,859 4,312 Total revenues 90,305 68,565 246,689 198,446 Expenses: Employee costs 20,671 18,170 63,414 57,777 General and administrative 9,408 7,455 25,920 23,034 Interest 23,483 18,334 58,654 58,260 Provision for credit losses ( 6,000 ) ( 1,590 ) ( 23,400 ) ( 1,590 ) Sales 5,962 4,288 17,186 12,475 Occupancy 2,031 1,952 5,820 5,870 Depreciation and amortization 406 409 1,207 1,254 Total operating expenses 55,961 49,018 148,801 157,080 Income before income tax expense 34,344 19,547 97,888 41,366 Income tax expense 8,931 5,864 26,040 12,807 Net income $ 25,413 $ 13,683 $ 71,848 $ 28,559 Earnings per share: Basic $ 1.22 $ 0.59 $ 3.39 $ 1.25 Diluted 0.95 0.52 2.61 1.12 Number of shares used in computing earnings per share: Basic 20,911 23,011 21,166 22,866 Diluted 26,654 26,218 27,512 25,439 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 Nine Months Ended September 30, September 30, 2022 2021 2022 2021 Net income $ 25,413 $ 13,683 $ 71,848 $ 28,559 Other comprehensive income/(loss); change in funded status of pension plan – – – – Comprehensive income $ 25,413 $ 13,683 $ 71,848 $ 28,559 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) Nine Months Ended September 30, 2022 2021 Cash flows from operating activities: Net income $ 71,848 $ 28,559 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 97,462 100,676 Depreciation and amortization 1,207 1,254 Amortization of deferred financing costs 5,860 5,360 Mark to finance receivables measured at fair value ( 15,283 ) 4,417 Provision for credit losses ( 23,400 ) ( 1,590 ) Stock-based compensation expense 2,966 1,265 Purchases of finance receivables held-for-sale – ( 23,700 ) Sale of finance receivables held-for-sale – 23,513 Changes in assets and liabilities: Accrued interest receivable 1,493 2,087 Deferred tax assets, net 5,005 3,146 Other assets 5,252 8,629 Accounts payable and accrued expenses 12,334 8,809 Net cash provided by operating activities 164,744 163,076 Cash flows from investing activities: Payments received on finance receivables held for investment 109,894 198,366 Purchases of finance receivables measured at fair value ( 1,311,735 ) ( 795,457 ) Payments received on finance receivables at fair value 635,401 546,897 Change in repossessions held in inventory 1,694 1,567 Purchase of furniture and equipment ( 1,778 ) ( 1,547 ) Net cash used in investing activities ( 566,524 ) ( 50,174 ) Cash flows from financing activities: Proceeds from issuance of securitization trust debt 1,104,000 761,545 Proceeds from issuance of subordinated renewable notes 4,004 7,416 Payments on subordinated renewable notes ( 3,214 ) ( 1,277 ) Net proceeds from (repayments of) warehouse lines of credit 139,477 ( 22,089 ) Net Proceeds from (repayment of) residual interest financing debt ( 4,311 ) 39,705 Repayment of securitization trust debt ( 804,774 ) ( 861,045 ) Payment of financing costs ( 10,407 ) ( 5,752 ) Purchase of common stock ( 41,535 ) ( 3,959 ) Exercise of options and warrants 14,698 2,167 Net cash provided by (used in) financing activities 397,938 ( 83,289 ) Increase (decrease) in cash and cash equivalents ( 3,842 ) 29,613 Cash and restricted cash at beginning of period 176,548 144,152 Cash and restricted cash at end of period $ 172,706 $ 173,765 Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 51,300 $ 53,931 Income taxes $ 13,977 $ 8,997 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 Nine Months Ended September 30, September 30, 2022 2021 2022 2021 Common Stock (Shares Outstanding) Balance, beginning of period 21,207 23,055 21,144 22,737 Common stock issued upon exercise of options and warrants 79 379 2,974 1,055 Repurchase of common stock ( 679 ) ( 434 ) ( 3,511 ) ( 792 ) Balance, end of period 20,607 23,000 20,607 23,000 Common Stock Balance, beginning of period $ 36,947 $ 73,204 $ 55,298 $ 72,926 Common stock issued upon exercise of options and warrants 282 1,042 14,698 2,167 Repurchase of common stock ( 7,250 ) ( 2,377 ) ( 41,535 ) ( 3,959 ) Stock-based compensation 1,448 530 2,966 1,265 Balance, end of period $ 31,427 $ 72,399 $ 31,427 $ 72,399 Retained Earnings Balance, beginning of period $ 162,966 $ 83,884 $ 116,531 $ 69,007 Net income 25,413 13,683 71,848 28,559 Balance, end of period $ 188,379 $ 97,566 $ 188,379 $ 97,566 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 $ 218,184 $ 161,394 $ 218,184 $ 161,394 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 nine-month period ended September 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 nine-month periods ending September 30, 2022 include a $ 8.2 million and $ 15.3 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 nine months ending September 30, 2021. Mark downs are 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 nine-month periods ending September 30, 2022 and 2021: Schedule of other income Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 (In thousands) (In thousands) Origination and servicing fees from third party receivables $ 2,016 $ 495 $ 4,268 $ 611 Direct mail revenues – 779 774 2,648 Convenience fee revenue 50 120 170 540 Recoveries on previously charged-off contracts 10 18 54 78 Sales tax refunds 209 134 512 423 Other 20 1 81 12 Other income for the period $ 2,305 $ 1,547 $ 5,859 $ 4,312 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. 9 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following table presents the supplemental balance sheet information related to leases: Supplemental balance sheet information related to leases September 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 ( 21,599 ) ( 17,624 ) Operating lease right-of-use assets, net $ 4,220 $ 8,195 $ Operating lease liabilities $ ( 4,749 ) $ ( 9,058 ) $ Finance Leases $ Property and equipment, at cost 3,407 3,407 Less: Accumulated depreciation ( 3,086 ) ( 2,348 ) Property and equipment, net $ 321 $ 1,059 $ Finance lease liabilities $ ( 348 ) $ ( 1,124 ) $ Weighted Average Discount Rate Operating lease 5.0 % 5.0 % Finance lease 6.5 % 6.5 % Maturities of lease liabilities were as follows: Schedule of maturities of lease liabilities (In thousands) Operating Finance Year Ending September 30, Lease Lease 2022 $ 817 $ 238 2023 1,888 84 2024 921 26 2025 794 9 2026 501 – Thereafter 1,160 – Total undiscounted lease payments 6,081 357 Less amounts representing interest ( 1,332 ) ( 9 ) Lease Liability $ 4,749 $ 348 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 Nine Months Ended September 30, September 30, 2022 2021 2022 2021 (In thousands) (In thousands) Operating lease cost $ 1,767 $ 1,768 $ 5,288 $ 5,398 Finance lease cost 257 308 813 924 Total lease cost $ 2,024 $ 2,076 $ 6,101 $ 6,322 The following table presents the supplemental cash flow information related to leases: Supplemental cash flow information related to leases Three Months Ended Nine Months Ended September 30, September 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 $ 1,921 $ 1,840 $ 5,616 $ 5,662 Operating cash flows from finance leases $ 249 $ 283 $ 776 $ 834 Financing cash flows from finance leases $ 8 $ 25 $ 36 $ 90 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 nine months ended September 30, 2022, we recorded stock-based compensation costs in the amount of $ 1.4 million and $ 3.0 million , respectively. These stock-based compensation costs were $ 530,000 and $ 1.3 million for the three and nine months ended September 30, 2021. As of September 30, 2022, unrecognized stock-based compensation costs to be recognized over future periods equaled $ 10.9 million . This amount will be recognized as expense over a weighted-average period of 2.6 years. 11 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following represents stock option activity for the nine months ended September 30, 2022: Share-based payment arrangement option activity Weighted Number of Weighted Average Shares Average Remaining (in thousands) Exercise Price Contractual Term Options outstanding at the beginning of period 13,075 $ 4.54 N/A Granted 1,710 10.28 N/A Exercised ( 2,975 ) 4.94 N/A Forfeited ( 520 ) 7.26 N/A Options outstanding at the end of period 11,290 $ 5.18 3.29 years Options exercisable at the end of period 7,708 $ 4.39 2.13 years The following table presents the price distribution of stock options outstanding and exercisable as of September 30, 2022 and December 31, 2021: Schedule of stock options outstanding and exercisable Number of shares as of Number of shares as of September 30, 2022 December 31, 2021 Outstanding Exercisable Outstanding Exercisable Range of exercise prices: (In thousands) (In thousands) $0.95 - $1.99 – – 577 577 $2.00 - $2.99 1,445 775 1,517 489 $3.00 - $3.99 3,933 3,638 4,285 3,382 $4.00 - $4.99 2,738 1,801 2,870 1,410 $5.00 - $5.99 – – – – $6.00 - $6.99 746 746 2,651 2,652 $7.00 - $7.99 748 748 1,175 1,175 $8.00 - $11.00 1,680 – – – Total shares 11,290 7,708 13,075 9,685 At September 30, 2022 the aggregate intrinsic value of options outstanding and exercisable was $ 29.2 million and $ 22.7 million , respectively. There were 2,974,223 million options exercised for the nine months ended September 30, 2022 compared to 1,054,541 for the comparable period in 2021. The total intrinsic value of options exercised was $ 23.1 million and $ 3.0 million for the nine-month periods ended September 30, 2022 and 2021. There were 2,691,000 shares available for future stock option grants under existing plans as of September 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 nine-month ended September 30, 2022 and 2021: Schedule of purchases of company stock Nine Months Ended September 30, 2022 September 30, 2021 Shares Avg. Price Shares Avg. Price Open market purchases 2,617,548 $ 11.20 734,700 $ 5.03 Shares redeemed upon net exercise of stock options 893,153 13.56 56,983 4.47 Total stock purchases 3,510,701 $ 11.80 791,683 $ 4.99 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 September 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. (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. 13 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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 $ 116.7 million and $ 232.4 million as of September 30, 2022 and December 31, 2021, respectively. The following table summarizes the delinquency status of finance receivables as of September 30, 2022 and December 31, 2021: Schedule of delinquency status of finance receivables September 30, December 31, 2022 2021 (In thousands) Deliquency Status Current $ 89,041 $ 186,625 31 - 60 days 18,090 30,980 61 - 90 days 8,047 12,070 91 + days 2,508 2,715 $ 117,686 $ 232,390 Finance receivables totaling $ 2.5 million and $ 2.7 million at September 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. 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. 14 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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 September 30, 2022 and December 31, 2021. Schedule of amortized cost basis of finance receivables September 30, December 31, 2022 2021 (In thousands) Annual Vintage Pool 2012 and prior $ 39 $ 131 2013 335 1,091 2014 2,349 6,881 2015 11,987 29,695 2016 37,268 76,728 2017 65,708 117,864 $ 117,686 $ 232,390 The following table presents a summary of the activity for the allowance for finance credit losses for the three-month and nine-month periods ended September 30, 2022 and 2021: Schedule of allowance for finance credit losses Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 (In thousands) (In thousands) Balance at beginning of period $ 35,672 $ 72,242 $ 56,206 $ 80,790 Provision for credit losses on finance receivables ( 6,000 ) ( 1,590 ) ( 23,400 ) ( 1,590 ) Charge-offs ( 4,375 ) ( 6,336 ) ( 14,181 ) ( 25,157 ) Recoveries 2,699 4,408 9,371 14,681 Balance at end of period $ 27,996 $ 68,724 $ 27,996 $ 68,724 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 September 30, December 31, 2022 2021 (In thousands) Gross balance of repossessions in inventory $ 2,250 $ 4,341 Allowance for losses on repossessed inventory ( 1,474 ) ( 1,871 ) Net repossessed inventory included in other assets $ 776 $ 2,470 15 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 Final Receivables Outstanding Outstanding Contractual Debt Scheduled Pledged at Principal at Principal at Interest Rate at Payment September 30, Initial September 30, December 31, September 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 – 224,825 – 25,846 – CPS 2017-D June 2024 17,526 196,300 13,892 26,744 5.30 % CPS 2018-A March 2025 20,221 190,000 16,770 29,518 5.17 % CPS 2018-B December 2024 24,742 201,823 21,179 36,092 5.61 % CPS 2018-C September 2025 29,131 230,275 24,879 42,765 5.90 % CPS 2018-D June 2025 35,386 233,730 30,545 49,634 5.61 % CPS 2019-A March 2026 44,846 254,400 38,693 62,667 5.32 % CPS 2019-B June 2026 46,255 228,275 39,622 61,730 5.15 % CPS 2019-C September 2026 54,352 243,513 48,110 75,065 4.19 % CPS 2019-D December 2026 69,792 274,313 61,562 98,625 3.58 % CPS 2020-A March 2027 64,894 260,000 60,828 99,485 3.83 % CPS 2020-B June 2027 72,574 202,343 47,591 87,048 5.87 % CPS 2020-C November 2027 97,439 252,200 84,204 138,899 3.03 % CPS 2021-A March 2028 103,253 230,545 86,058 147,516 1.29 % CPS 2021-B June 2028 127,433 240,000 116,429 179,856 1.71 % CPS 2021-C September 2028 183,844 291,000 168,163 250,003 1.50 % CPS 2021-D December 2028 249,729 349,202 236,820 330,325 1.70 % CPS 2022-A April 2029 266,687 316,800 247,530 – 2.04 % CPS 2022-B October 2029 384,556 395,600 356,044 – 4.05 % CPS 2022-C April 2030 420,885 391,600 372,262 – 5.17 % $ 2,313,545 $ 5,638,234 $ 2,071,179 $ 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 $ 213.6 million in 2022, $ 967.3 million in 2023, $ 302.1 million in 2024, $ 283.2 million in 2025, $ 165.3 million in 2026, $ 101.6 million in 2027, and $ 23.9 million in 2028. (2) Includes repossessed assets that are included in Other assets on our Unaudited Condensed Consolidated Balance Sheet. 16 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Debt issuance costs of $ 14.1 million and $ 12.0 million as of September 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 September 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 September 30, 2022, restricted cash under the various agreements totaled approximately $ 159.8 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 September 30, 2022 and December 31, 2021 are summarized below: Schedule of debt outstanding Amount Outstanding at September 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 $ 138,596 $ 70,590 4.15% over a commercial paper rate (Minimum 5.15%) January 2024 106,891 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 7.67 % and 8.93 % at September 30, 2022 and December 31, 2021, respectively Weighted average maturity of July 2024 and January 2024 at September 30, 2022 and December 31, 2021, respectively 27,249 26,459 $ 322,736 $ 186,780 17 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 $ 106.9 million outstanding under this facility at September 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. 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 $ 138.6 million outstanding under this facility at September 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 Unamortized debt issuance costs of $ 440 ,000 and $ 629 ,000 as of September 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 $ 3.0 million and $ 400 ,000 as of September 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 Nine Months Ended September 30, September 30, 2022 2021 2022 2021 (In thousands) (In thousands) Interest on finance receivables $ 7,620 $ 16,062 $ 28,766 $ 56,652 Interest on finance receivables at fair value 71,734 50,951 196,204 141,882 Other interest income 463 5 577 17 $ Interest income $ 79,817 $ 67,018 $ 225,547 $ 198,551 The following table presents the components of interest expense: Schedule of interest expense Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 (In thousands) (In thousands) Securitization trust debt $ 18,519 $ 15,292 $ 47,792 $ 50,568 Warehouse lines of credit 3,342 929 5,887 3,264 Residual interest financing 1,050 1,413 3,193 2,446 Subordinated renewable notes 572 700 1,782 1,982 $ Interest expense $ 23,483 $ 18,334 $ 58,654 $ 58,260 18 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 nine-month periods ended September 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 nine-month periods ended September 30, 2022 and 2021: Computation of earnings per share Three Months Ended Nine Months Ended September 30, September 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 20,911 23,011 21,166 22,866 Incremental common shares attributable to exercise of outstanding options and warrants 5,743 3,207 6,346 2,573 Weighted average number of common shares used to compute diluted earnings per share 26,654 26,218 27,512 25,439 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 nine-month periods ended September 30, 2022 would have included an additional 1.7 million and 1.0 million shares, respectively, attributable to the exercise of outstanding options and warrants. For the three-month and nine-month periods ended September 30, 2021, an additional 5.6 million and 5.8 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 September 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. 19 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 $ 14.6 million as of September 30, 2022 is more likely than not based on forecasted future net earnings. Our net deferred tax asset of $14.6 million consists of approximately $ 8.3 million of net U.S. federal deferred tax assets and $ 6.3 million of net state deferred tax assets. Income tax expense was $ 8.9 million and $ 26.0 million for the three months and nine months ended September 30, 2022, representing effective income tax rates of 26 % and 27 %, respectively, compared to income tax expense of $ 5.9 million and $ 12.8 million for the three months and nine months ended September 30, 2021, and represents an effective income tax rates of 30 % and 31 % 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. 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 September 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 September 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 September 30, 2022 does not exceed $11.3 million. 20 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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 September 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. 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 Nine Months Ended September 30, September 30, 2022 2021 2022 2021 (In thousands) (In thousands) Balance at beginning of period $ 2,174,133 $ 1,582,175 $ 1,749,098 $ 1,523,726 Finance receivables at fair value acquired during period 407,260 310,340 1,311,735 795,457 Payments received on finance receivables at fair value ( 209,627 ) ( 191,458 ) ( 635,401 ) ( 546,897 ) Net interest income accretion on fair value receivables ( 36,696 ) ( 33,864 ) ( 97,462 ) ( 100,676 ) Mark to fair value 8,183 – 15,283 ( 4,417 ) Balance at end of period $ 2,343,253 $ 1,667,193 $ 2,343,253 $ 1,667,193 21 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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 September 30, 2022 December 31, 2021 Contractual Fair Contractual Fair Balance Value Balance Value (In thousands) Finance receivables measured at fair value $ 2,567,372 $ 2,343,253 $ 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 September 30, December 31, September 30, December 31, 2022 2021 Unobservable Inputs 2022 2021 (In thousands) Assets: Finance receivables measured at fair value $ 2,343,253 $ 1,749,098 Discount rate 8.9% - 11.3% 8.9% - 11.3% Cumulative net losses 10.0% - 18.4% 10.0% - 18.4% The following table summarizes the delinquency status of these finance receivables measured at fair value as of September 30, 2022 and December 31, 2021: Schedule of delinquency status of finance receivables measured at fair value September 30, December 31, 2022 2021 (In thousands) Delinquency Status Current $ 2,306,615 $ 1,787,641 31 - 60 days 152,622 115,924 61 - 90 day 57,888 38,999 91 + days 22,018 11,564 Repo 28,229 18,571 $ 2,567,372 $ 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 September 30, 2022 the finance receivables related to the repossessed vehicles in inventory totaled $2.3 million. We have applied a valuation adjustment, or loss allowance, of $1.5 million, which is based on a recovery rate of approximately 34%, resulting in an estimated fair value and carrying amount of $776,000. 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 September 30, 2022 and 2021. 22 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The estimated fair values of financial assets and liabilities at September 30, 2022 and December 31, 2021, were as follows: Schedule of estimated fair values of financial assets and liabilities As of September 30, 2022 Financial Instrument (In thousands) Carrying Fair Value Measurements Using: Value Level 1 Level 2 Level 3 Total Assets: Cash and cash equivalents $ 12,944 $ 12,944 $ – $ – $ 12,944 Restricted cash and equivalents 159,762 159,762 – – 159,762 Finance receivables, net 89,690 – – 79,700 79,700 Accrued interest receivable 776 – – 776 776 Liabilities: Warehouse lines of credit $ 242,449 $ – $ – $ 242,449 $ 242,449 Residual interest financing 49,560 49,560 49,560 Accrued interest payable 5,063 – – 5,063 5,063 Securitization trust debt 2,057,100 – – 1,969,599 1,969,599 Subordinated renewable notes 27,249 – – 27,249 27,249 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 Residual interest financing 53,682 53,682 53,682 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 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. 23