CONSUMER PORTFOLIO SERVICES, INC. 10-K

Item 9A. Controls and Procedures Disclosure Controls and Procedures . Under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, management of the Company has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the " Exchange Act " ) as of December 31, 2022 (the " Evaluation Date " ). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective (i) to ensure that information required to be disclosed by us in reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission; and (ii) to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to our management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. The certifications of our Chief Executive Officer and Chief Financial Officer required under Section 302 of the Sarbanes-Oxley Act have been filed as Exhibits 31.1 and 31.2 to this report. 53 Internal Control. Management’s Report on Internal Control over Financial Reporting is included in this Annual Report, immediately below. During the fiscal quarter ended December 31, 2022, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Management’s Report on Internal Control over Financial Reporting . We are responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can only provide reasonable assurance with respect to financial statement preparation and presentation. Management, with the participation of the Chief Executive and Chief Financial Officers, assessed the effectiveness of our internal control over financial reporting as of December 31, 2022. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the 2013 Internal Control — Integrated Framework. Based on this assessment, management, with the participation of the Chief Executive and Chief Financial Officers, believes that, as of December 31, 2022, our internal control over financial reporting is effective based on those criteria. Our internal control over financial reporting as of December 31, 2022, has been audited by Crowe LLP, an independent registered public accounting firm, as stated in their report which is included herein. Item 9B. Other Information Not Applicable. Item 9C. Disclosure Regarding Foreign Jurisdictions That Prevent Inspections Not Applicable. 54 PART III Item 10. Directors and Executive Officers and Corporate Governance Information regarding directors of the registrant is incorporated by reference to the registrant’s definitive proxy statement for its annual meeting of shareholders to be held in 2023 (the " 2023 Proxy Statement " ). The 2023 Proxy Statement will be filed not later than May 1, 2023. Information regarding executive officers of the registrant appears in Part I of this report, and is incorporated herein by reference. Item 11. Executive Compensation Incorporated by reference to the 2023 Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Incorporated by reference to the 2023 Proxy Statement. Item 13. Certain Relationships and Related Transactions, and Director Independence Incorporated by reference to the 2023 Proxy Statement. Item 14. Principal Accountant Fees and Services Incorporated by reference to the 2023 Proxy Statement. 55 PART IV Item 15. Exhibits, Financial Statement Schedules The financial statements listed below under the caption " Index to Financial Statements " are filed as a part of this report. No financial statement schedules are filed as the required information is inapplicable or the information is presented in the Consolidated Financial Statements or the related notes. Separate financial statements of the Company have been omitted as the Company is primarily an operating company and its subsidiaries are wholly owned and do not have minority equity interests held by any person other than the Company in amounts that together exceed 5% of the total consolidated assets as shown by the most recent year-end Consolidated Balance Sheet. The exhibits listed below are filed as part of this report, whether filed herewith or incorporated by reference to an exhibit filed with the report identified in the parentheses following the description of such exhibit. Unless otherwise indicated, each such identified report was filed by or with respect to the registrant. Exhibit Number Description (“**” indicates compensatory plan or agreement.) 3.1 Restated Articles of Incorporation (Exhibit 3.1 to Form 10-K filed March 31, 2009) 3.1.1 Certificate of Designation re Series B Preferred (Exhibit 3.1.1 to Form 8-K filed by the registrant on December 30, 2010) 3.2 Amended and Restated Bylaws (Exhibit 3.2 to Form 8-K filed December 3, 2021) 4. Instruments defining the rights of holders of long-term debt of certain consolidated subsidiaries of the registrant are omitted pursuant to the exclusion set forth in subdivisions (b)(iv)(iii)(A) and (b)(v) of Item 601 of Regulation S-K (17 CFR 229.601). The registrant agrees to provide copies of such instruments to the United States Securities and Exchange Commission upon request. 4.1 Form of Indenture re Renewable Unsecured Subordinated Notes (“RUS Notes”). (Exhibit 4.1 to Form S-1, no. 333-168976) 4.2 Form of RUS Notes (Exhibit 4.2 to Form S-1, no. 333-168976) 4.3 Supplement No. 1 dated December 7, 2010 to Indenture re RUS Notes (Exhibit 4.3 to Form S-1/A, no. 333-168976) 4.4 Supplement No. 2 dated January 22, 2014 to Indenture re RUS Notes (Exhibit 4.4 to Form S-1, no. 333-190766) 10.2 1997 Long-Term Incentive Stock Plan ("1997 Plan") (Exhibit 10.20 to Form S-2, no. 333-121913) ** 10.2.1 Form of Option Agreement under 1997 Plan (Exhibit 10.2.1 to Form 10-K filed March 13, 2006) ** 10.14 2006 Long-Term Equity Incentive Plan as amended May 18, 2015 (Incorporated by reference to pages A-1 through A-10 of the definitive proxy statement filed by the registrant on April 27, 2015)** 10.14.1 Form of Option Agreement under the 2006 Long-Term Equity Incentive Plan (Exhibit 10.14.1 to registrant's Form 10-K filed March 9, 2007)** 10.14.2 Form of Option Agreement under the 2006 Long-Term Equity Incentive Plan (Exhibit 99.(D)(2) to registrant's Schedule TO filed November 12, 2009)** 10.14.3 Form of Option Agreement under the 2006 Long-Term Equity Incentive Plan (Exhibit 99.(D)(3) to registrant's Schedule TO filed November 12, 2009)** 14 Registrant’s Code of Ethics for Senior Financial Officers (Exhibit 14 to Form 10-K filed March 13, 2006) 21 List of subsidiaries of the registrant (filed herewith) 23.1 Consent of Crowe LLP (filed herewith) 31.1 Rule 13a-14(a) certification by Chief Executive Officer (filed herewith) 31.2 Rule 13a-14(a) certification by Chief Financial Officer (filed herewith) 32 Section 1350 certification (filed herewith) 101.INS Inline XBRL Instance Document 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) Item 16. Form 10-K Summary None. 56 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CONSUMER PORTFOLIO SERVICES, INC. (registrant) March 15, 2023 By: /s/ CHARLES E. BRADLEY, JR. Charles E. Bradley, Jr., Director and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. March 15, 2023 /s/ CHARLES E. BRADLEY, JR. Charles E. Bradley, Jr., Director and Chief Executive Officer (Principal Executive Officer) March 15, 2023 /s/ STEPHEN H. DECKOFF Stephen H. Deckoff, Director March 15, 2023 /s/ LOUIS M. GRASSO Louis M. Grasso, Director March 15, 2023 /s/ WILLIAM W. GROUNDS William W. Grounds, Director March 15, 2023 /s/ BRIAN J. RAYHILL Brian J. Rayhill, Director March 15, 2023 /s/ WILLIAM B. ROBERTS William B. Roberts, Director March 15, 2023 /s/ JAMES E. WALKER James E. Walker, Director March 15, 2023 /s/ GREGORY S. WASHER Gregory S. Washer, Director March 15, 2023 /s/ DANIEL S. WOOD Daniel S. Wood, Director March 15, 2023 /s/ DENESH BHARWANI Denesh Bharwani, Executive Vice President and Chief Financial Officer (Principal Accounting Officer) 57 INDEX TO FINANCIAL STATEMENTS Page Reference Report of Crowe LLP, Independent Registered Public Accounting Firm (PCAOB ID: 173 ) F-2 Consolidated Balance Sheets as of December 31, 2022 and 2021 F-5 Consolidated Statements of Income for the years ended December 31, 2022, 2021 and 2020 F-6 Consolidated Statements of Comprehensive Income for the years ended December 31, 2022, 2021 and 2020 F-7 Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2022, 2021 and 2020 F-8 Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021 and 2020 F-9 Notes to Consolidated Financial Statements F-10 F- 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Shareholders and the Board of Directors of Consumer Portfolio Services, Inc. and Subsidiaries Las Vegas, Nevada Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Consumer Portfolio Services, Inc. and Subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively referred to as the "financial statements") 2 . We also have audited the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO. Basis for Opinions The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Controls over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. F- 2 Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Accounting for Loans at Fair Value As described in Notes 1 and 12 to the consolidated financial statements, the Company carries all finance receivables acquired after 2017 at fair value on a recurring basis. The Company had $2.4 billion in finance receivables that are carried at fair value, all of which are classified as level 3 fair values as they contain one or more inputs which are unobservable and significant to the fair value measurement. With assistance from an outside valuation expert, the Company used a level 3 fair value methodology for the fair value of finance receivables. The significant assumptions used by the Company to calculate the fair value of these financial receivables include the magnitude and timing of net charge-offs and the rate of amortization of the portfolio of finance receivables. These significant assumptions were based on the factors that market participants use in pricing similar receivables and are based on the best information available in the circumstances. We identified the valuation of finance receivables carried at fair value as a critical audit matter as this estimate requires subjective auditor judgment. Our principal considerations in making this determination are (i) there was significant judgment and estimation by the Company in determining the assumptions to estimate fair value, which in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures related to the fair value of these finance receivables, and (ii) the audit effort involved professionals with specialized skill and knowledge to assist in evaluating the audit evidence obtained from these procedures. F- 3 Testing the design and operating effectiveness of controls over the application of the assumptions used to support the estimate of loans at fair value included addressing: · The completeness and accuracy of data · Third-party model review · Review of management’s judgments and significant assumptions over inputs Substantively testing management's process, including evaluating management’s judgments and assumptions, for developing the estimate of loans at fair value included: · Using an auditor employed valuation specialist to assist in testing the Company’s estimate of fair value of the finance receivables. Testing included evaluation of certain management significant assumptions and, evaluating the appropriateness of the methodology including a recalculation of the model. · Testing the completeness and accuracy of the underlying data used in the fair value of finance receivables estimate. Allowance for Finance Credit Losses – Qualitative Factors Related to the CECL Reasonable and Supportable Forecasts As described in Notes 1 and 3 to the financial statements, the Company has a gross receivables portfolio of $92.3 million and a related allowance for finance credit losses (ACL) on loans of $21.7 million for the year ended December 31, 2022. Management estimates the allowance using relevant information from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical loss experience for older receivables, aggregated into vintage pools based on the calendar quarter of origination is used to estimate expected losses for less seasoned quarterly vintage pools. This estimate is adjusted by certain qualitative factors that may impact future credit losses. The qualitative factors represent management’s estimate of the impact of future losses. The use of qualitative factors to adjust historical losses for management’s forecast requires significant judgment. Management applies qualitative factors to adjust its estimation of the timing and amount losses to represent its future economic forecast. We identified auditing the reasonableness of qualitative factors used to create forecasts in its credit loss model as a critical audit matter as it involves especially subjective auditor judgment. Testing the design and operating effectiveness of controls over the application of the assumptions used to support the estimate of the allowance for credit losses included addressing: · The completeness and accuracy of internal data · Review of management’s judgments and significant assumptions over inputs Substantively testing management's process, including evaluating management’s judgments and assumptions, for developing the estimate of the allowance for credit losses included: · Evaluating the appropriateness of the methodology for developing the forecast and qualitative factors. · Testing the completeness and accuracy of data used in the calculation of qualitative factors. · Evaluating the reasonableness of the forecasts. · Inspecting and evaluating key assumptions and judgments used in developing the qualitative factors. /s/ Crowe LLP We have served as the Company's auditor since 2008. Dallas, Texas March 15, 2023 F- 4 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) December 31, December 31, 2022 2021 ASSETS Cash and cash equivalents $ 13,490 $ 29,928 Restricted cash and equivalents 149,299 146,620 Finance receivables measured at fair value 2,476,617 1,749,098 Finance receivables 92,304 232,390 Less: Allowance for finance credit losses ( 21,753 ) ( 56,206 ) Finance receivables, net 70,551 176,184 Furniture and equipment, net 1,660 1,129 Deferred tax assets, net 10,177 19,575 Accrued interest receivable 649 2,269 Other assets 30,325 34,775 Total Assets $ 2,752,768 $ 2,159,578 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Accounts payable and accrued expenses $ 55,421 $ 43,648 Warehouse lines of credit 285,328 105,610 Residual interest financing 49,623 53,682 Securitization trust debt 2,108,744 1,759,972 Subordinated renewable notes 25,263 26,459 Total Liabilities 2,524,379 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; 20,131,323 and 21,143,764 shares issued and outstanding at December 31, 2022 and December 31, 2021, respectively 28,906 55,298 Retained earnings 202,514 116,531 Accumulated other comprehensive loss ( 3,031 ) ( 1,622 ) Total stockholders' equity 228,389 170,207 Total liabilities and stockholders' equity $ 2,752,768 $ 2,159,578 See accompanying Notes to Consolidated Financial Statements. F- 5 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) Year Ended December 31, 2022 2021 2020 Revenues: Interest income $ 305,237 $ 266,266 $ 294,982 Mark to finance receivables measured at fair value 15,283 ( 4,417 ) ( 29,528 ) Other income 9,189 5,962 5,707 Total revenues 329,709 267,811 271,161 Expenses: Employee costs 84,282 80,534 80,198 General and administrative 37,618 34,616 31,981 Interest 87,524 75,239 101,338 Provision for credit losses ( 28,100 ) ( 14,590 ) 14,113 Sales 23,039 16,876 14,206 Occupancy 7,535 7,715 7,421 Depreciation and amortization 1,618 1,675 1,784 Total operating expenses 213,516 202,065 251,041 Income before income tax expense (benefit) 116,193 65,746 20,120 Income tax expense (benefit) 30,210 18,222 ( 1,557 ) Net income $ 85,983 $ 47,524 $ 21,677 Earnings per share: Basic $ 4.10 $ 2.11 $ 0.96 Diluted 3.23 1.84 0.90 Number of shares used in computing earnings per share: Basic 20,958 22,562 22,611 Diluted 26,589 25,780 24,003 See accompanying Notes to Consolidated Financial Statements. F- 6 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) Year Ended December 31, 2022 2021 2020 Net income $ 85,983 $ 47,524 $ 21,677 Other comprehensive income (loss); change in funded status of pension plan, net of $ 513 , $ 2,554 and $ 55 in tax for 2022, 2021 and 2020, respectively ( 1,409 ) 6,949 ( 150 ) Comprehensive income $ 84,574 $ 54,473 $ 21,527 See accompanying Notes to Consolidated Financial Statements. F- 7 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (In thousands) Accumulated Other Common Stock Retained Comprehensive Shares Amount Earnings Loss Total Balance at January 1, 2020 22,531 $ 71,257 $ 47,330 $ ( 8,421 ) $ 110,166 Common stock issued upon exercise of options and warrants 558 949 – – 949 Repurchase of common stock ( 352 ) ( 1,215 ) – – ( 1,215 ) Other comprehensive income (loss) – – – ( 150 ) ( 150 ) Stock-based compensation – 1,935 – – 1,935 Net income – – 21,677 – 21,677 Balance at December 31, 2020 22,737 $ 72,926 $ 69,007 $ ( 8,571 ) $ 133,362 Common stock issued upon exercise of options and warrants 2,291 6,048 – – 6,048 Repurchase of common stock ( 3,884 ) ( 25,676 ) – – ( 25,676 ) Other comprehensive income (loss) – – – 6,949 6,949 Stock-based compensation – 2,000 – – 2,000 Net income – – 47,524 – 47,524 Balance at December 31, 2021 21,144 $ 55,298 $ 116,531 $ ( 1,622 ) $ 170,207 Common stock issued upon exercise of options and warrants 3,127 15,277 – – 15,277 Repurchase of common stock ( 4,140 ) ( 46,096 ) – – ( 46,096 ) Other comprehensive income (loss) – – – ( 1,409 ) ( 1,409 ) Stock-based compensation – 4,427 – – 4,427 Net income – – 85,983 – 85,983 Balance at December 31, 2022 20,131 $ 28,906 $ 202,514 $ ( 3,031 ) $ 228,389 See accompanying Notes to Consolidated Financial Statements. F- 8 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, 2022 2021 2020 Cash flows from operating activities: Net income $ 85,983 $ 47,524 $ 21,677 Adjustments to reconcile net income to net cash provided by operating activities: Accretion of deferred acquisition fees and origination costs – 651 1,138 Net interest income accretion on fair value receivables 135,147 134,020 133,771 Depreciation and amortization 1,618 1,675 1,784 Amortization of deferred financing costs 8,207 7,114 8,102 Mark to fair value of finance receivables measured at fair value ( 15,283 ) 4,417 29,528 Provision for credit losses ( 28,100 ) ( 14,590 ) 14,113 Stock-based compensation expense 4,427 2,000 1,935 Changes in assets and liabilities: Accrued interest receivable 1,620 2,748 6,628 Other assets 2,551 ( 3,787 ) 2,713 Deferred tax assets, net 9,398 8,937 21,493 Accounts payable and accrued expenses 10,364 7,485 ( 4,115 ) Net cash provided by operating activities 215,932 198,194 238,767 Cash flows from investing activities: Payments received on finance receivables held for investment 133,733 249,098 332,296 Purchases of finance receivables measured at fair value ( 1,673,166 ) ( 1,107,537 ) ( 739,734 ) Payments on receivables portfolio at fair value 825,783 743,728 496,747 Change in repossessions held in inventory 1,899 1,329 3,746 Purchase of furniture and equipment ( 2,149 ) ( 1,976 ) ( 24 ) Net cash provided by (used in) investing activities ( 713,900 ) ( 115,358 ) 93,031 Cash flows from financing activities: Proceeds from issuance of securitization trust debt 1,411,018 1,110,747 714,543 Proceeds from issuance of subordinated renewable notes 4,004 7,988 6,750 Payments on subordinated renewable notes ( 5,200 ) ( 2,852 ) ( 2,961 ) Net advances (repayments) of warehouse lines of credit 181,868 ( 14,503 ) ( 16,271 ) Net advances (repayments) of residual interest financing debt ( 4,311 ) 28,735 ( 14,424 ) Repayment of securitization trust debt ( 1,060,052 ) ( 1,153,114 ) ( 1,009,988 ) Payment of financing costs ( 12,299 ) ( 7,813 ) ( 5,861 ) Purchase of common stock ( 46,096 ) ( 25,676 ) ( 1,215 ) Exercise of options and warrants 15,277 6,048 949 Net cash provided by (used in) financing activities 484,209 ( 50,440 ) ( 328,478 ) Increase (decrease) in cash and cash equivalents ( 13,759 ) 32,396 3,320 Cash and cash equivalents at beginning of year 176,548 144,152 140,832 Cash and cash equivalents at end of year $ 162,789 $ 176,548 $ 144,152 Supplemental disclosure of cash flow information: Cash paid (received) during the period for: Interest $ 76,696 $ 69,476 $ 93,571 Income taxes 16,182 14,253 ( 23,997 ) See accompanying Notes to Consolidated Financial Statements. F- 9 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies Description of Business Consumer Portfolio Services, Inc. ("CPS") was incorporated in California on March 8, 1991. CPS and its subsidiaries (collectively, the "Company") specialize in purchasing and servicing retail automobile installment sale contracts ("Contracts") originated by licensed motor vehicle dealers ("Dealers") located throughout the United States. Customers located in California, Texas, Ohio, Illinois, Florida, Pennsylvania, and Indiana represented 8.2 %, 7.8 %, 7.6 %, 5.7 %, 5.1 %, 4.6 %, and 4.6 % respectively, of contracts purchased during 2022 compared with 10.9 %, 6.1 %, 9.3 %, 3.6 %, 5.0 %, 4.6 %, and 5.0 % respectively in 2021. No other state had a concentration in excess of 4.6% in 2022. We specialize in contracts with vehicle purchasers who generally would not be expected to qualify for traditional financing provided by commercial banks or automobile manufacturers’ captive finance companies. We are subject to various regulations and laws as they relate to the extension of credit in consumer credit transactions. Failure to comply with such laws and regulations could have a material adverse effect on the Company. Principles of Consolidation The Consolidated Financial Statements include the accounts of Consumer Portfolio Services, Inc. and its wholly-owned subsidiaries, certain of which are special purpose subsidiaries ( " SPS " ), formed to accommodate the structures under which we purchase and securitize our contracts. The Consolidated Financial Statements also include the accounts of CPS Leasing, Inc., an 80% owned subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation. Cash and Cash Equivalents For purposes of the statements of cash flows, we consider all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. Cash equivalents consist of cash on hand and due from banks and money market accounts. Substantially all of our cash is deposited at three financial institutions. We maintain cash due from banks in excess of the banks' insured deposit limits. We do not believe we are exposed to any significant credit risk on these deposits. As part of certain financial covenants related to debt facilities, we are required to maintain a minimum unrestricted cash balance. As of December 31, 2022, our unrestricted cash balance was $ 13.5 million , which exceeded the minimum amounts required by our financial covenants. Finance Receivables Finance receivables, which we have the intent and ability to hold for the foreseeable future or until maturity or payoff, are presented at cost. All finance receivable contracts are held for investment. Interest income is accrued on the unpaid principal balance. Origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the interest method without anticipating prepayments. Generally, payments received on finance receivables are restricted to certain securitized pools, and the related contracts cannot be resold. Finance receivables are charged off pursuant to the controlling documents of certain securitized pools, generally as described below under Charge Off Policy. Management may authorize an extension of payment terms if collection appears likely during the next calendar month. F- 10 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Our portfolio of finance receivables consists of small-balance homogeneous contracts that are collectively evaluated for impairment on a portfolio basis. 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. 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. 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. For the twelve-month period ended December 31, 2022 include a $ 15.3 million positive mark to the carrying value of the portion of the receivables portfolio accounted for at fair value. The Company considered the effect of the pandemic on the portfolio of finance receivables carried at fair value and recorded a mark down to that portfolio of $ 4.4 million for the twelve-month period ended December 31, 2021. 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. Allowance for Finance Credit Losses In order to estimate an appropriate allowance for losses likely incurred on finance receivables, we use a loss allowance methodology commonly referred to as " static pooling, " which stratifies the finance receivable portfolio into separately identified pools based on their period of origination, then uses historical performance of seasoned pools to estimate future losses on current pools. Historical loss experience is adjusted as necessary for current economic conditions. We consider our portfolio of finance receivables to be relatively homogenous and consequently we analyze credit performance primarily in the aggregate rather than stratification by any particular credit quality indicator. Using analytical and formula driven techniques, we estimate an allowance for finance credit losses, which we believe is adequate for current expected credit losses that can be reasonably estimated in our portfolio of finance receivable contracts. Net losses incurred on finance receivables are charged to the allowance. We evaluate the adequacy of the allowance by examining current delinquencies, the characteristics of the portfolio, the value of the underlying collateral and historical loss trends. As conditions change, our level of provisioning and/or allowance may change. F- 11 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Charge Off Policy Delinquent contracts for which the related financed vehicle has been repossessed are generally charged off at the earliest of (1) the month in which the proceeds from the sale of the financed vehicle are received, (2) the month in which 90 days have passed from the date of repossession or (3) the month in which the Contract becomes seven scheduled payments past due (see Repossessed and Other Assets below). The amount charged off is the remaining principal balance of the Contract, after the application of the net proceeds from the liquidation of the financed vehicle. With respect to delinquent contracts for which the related financed vehicle has not been repossessed, the remaining principal balance is generally charged off no later than the end of the month that the Contract becomes five scheduled payments past due. Contract Acquisition Fees and Origination Costs Upon purchase of a Contract from a Dealer, we generally either charge or advance the Dealer an acquisition fee. Dealer acquisition fees and deferred origination costs are applied to the recorded value of finance receivables and are accreted into earnings as an adjustment to the yield over the estimated life of the Contract using the interest method. However, for receivables measured at fair value, 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. Repossessed and Other Assets If a Contract obligor fails to make or keep promises for payments, or if the obligor is uncooperative or attempts to evade contact or hide the vehicle, a supervisor will review the collection activity relating to the account to determine if repossession of the vehicle is warranted. Generally, such a decision is made between the 60th and 90th day past the obligor’s payment due date, but could occur sooner or later, depending on the specific circumstances. At the time the vehicle is repossessed we stop accruing interest on the Contract, and reclassify the remaining Contract balance to the line item "Other Assets" on our Consolidated Balance Sheet at its estimated fair value less costs to sell. Included in other assets in the accompanying Consolidated Balance Sheets are repossessed vehicles pending sale of $ 571,000 and $ 2.5 million at December 31, 2022 and 2021, respectively. T reatment of Securitizations Our term securitization structure has generally been as follows: We sell contracts we acquire to a wholly-owned SPS, which has been established for the limited purpose of buying and reselling our contracts. The SPS then transfers the same contracts to another entity, typically a statutory trust ( " Trust " ). The Trust issues interest-bearing asset-backed securities ( " Notes " ), in a principal amount equal to or less than the aggregate principal balance of the contracts. We typically sell these contracts to the Trust at face value and without recourse, except representations and warranties that we make to the Trust that are similar to those provided to us by the Dealer. One or more investors (the " Noteholders " ) purchase the Notes issued by the Trust; the proceeds from the sale of the Notes are then used to purchase the contracts from us. We may retain or sell subordinated Notes issued by the Trust. In addition, we have provided " Credit Enhancement " for the benefit of the Noteholders in three forms: (1) an initial cash deposit to a bank account (a " Spread Account " ) held by the Trust, (2) overcollateralization of the Notes, where the principal balance of the Notes issued is less than the principal balance of the contracts, and (3) in the form of subordinated Notes. The agreements governing the securitization transactions (collectively referred to as the " Securitization Agreements " ) require that the initial level of Credit Enhancement be supplemented by a portion of collections from the contracts until the level of Credit Enhancement reaches specified levels, which are then maintained. The specified levels are generally computed as a percentage of the principal amount remaining unpaid under the related contracts. The specified levels at which the Credit Enhancement is to be maintained will vary depending on the performance of the portfolios of contracts held by the Trusts and on other conditions. Such levels have increased and decreased from time to time based on performance of the various portfolios, and have also varied from one Trust to another. F- 12 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Our warehouse securitization structures are similar to the above, except that (i) the SPS that purchases the contracts pledges the contracts to secure promissory notes or loans that it issues, and (ii) no increase in the required amount of Credit Enhancement is contemplated. Upon each sale of contracts in a securitization structured as a secured financing, we retain as assets on our Consolidated Balance Sheet the securitized contracts and record as indebtedness the Notes issued in the transaction. We have the power to direct the most significant activities of the SPS. In addition, we have the obligation to absorb losses and the rights to receive benefits from the SPS, both of which could be potentially significant to the SPS. These types of securitization structures are treated as secured financings, in which the receivables remain on our Consolidated Balance Sheet, and the debt issued by the SPS is shown as a securitization trust debt on our Consolidated Balance Sheet. We receive periodic base servicing fees for the servicing and collection of the contracts. In addition, we are entitled to the cash flows from the Trusts that represent collections on the contracts in excess of the amounts required to pay principal and interest on the Notes, the base servicing fees, and certain other fees (such as trustee and custodial fees). Required principal payments on the Notes are generally defined as the payments sufficient to keep the principal balance of the Notes equal to the aggregate principal balance of the related contracts (excluding those contracts that have been charged off), or a pre-determined percentage of such balance. Where that percentage is less than 100%, the related Securitization Agreements require accelerated payment of principal until the principal balance of the Notes is reduced to the specified percentage. Such accelerated principal payment is said to create " overcollateralization " of the Notes. If the amount of cash required for payment of fees, interest and principal on the senior Notes exceeds the amount collected during the collection period, the shortfall is generally withdrawn from the Spread Account, if any. If the cash collected during the period exceeds the amount necessary for the above allocations plus required principal payments on the subordinated Notes, if any, and there is no shortfall in the related Spread Account or other form of Credit Enhancement, the excess is released to us. If the total Credit Enhancement amount is not at the required level, then the excess cash collected is retained in the Trust until the specified level is achieved. Cash in the Spread Accounts is restricted from our use. Cash held in the various Spread Accounts is invested in high quality, liquid investment securities, as specified in the Securitization Agreements. In all of our term securitizations we have transferred the receivables (through a subsidiary) to the securitization Trust. We report the assets and liabilities of the securitization Trust on our Consolidated Balance Sheet. The Noteholders’ and the related securitization Trusts’ recourse against us for failure of the contract obligors to make payments on a timely basis is limited, in general, to our Finance Receivables, and Spread Accounts. Servicing We consider the contractual servicing fee received on our managed portfolio held by non-consolidated subsidiaries to be equal to adequate compensation. Additionally, we consider that these fees would fairly compensate a substitute servicer, should one be required. As a result, no servicing asset or liability has been recognized. Servicing fees received on the managed portfolio held by non-consolidated subsidiaries are reported as income when earned. Servicing fees received on the managed portfolio held by consolidated subsidiaries are included in interest income when earned. Servicing costs are charged to expense as incurred. Servicing fees receivable, which are included in Other Assets in the accompanying Consolidated Balance Sheets, represent fees earned but not yet remitted to us by the trustee. Furniture and Equipment Furniture and equipment are stated at cost net of accumulated depreciation. We calculate depreciation using the straight-line method over the estimated useful lives of the assets, which range from three to five years. Assets held under capital leases and leasehold improvements are amortized over the lesser of the estimated useful lives of the assets or the related lease terms. Amortization expense on assets acquired under capital lease is included with depreciation expense on owned assets. F- 13 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. Other Income The following table presents the primary components of Other Income: Schedule of other income Year Ended December 31, 2022 2021 2020 (In thousands) Third-party portfolio $ 6,814 $ – $ – Direct mail revenues 774 3,391 3,312 Convenience fee revenue 218 590 1,490 Recoveries on previously charged-off contracts 71 115 111 Sales tax refunds 737 580 748 Other 575 1,286 46 Other income for the period $ 9,189 $ 5,962 $ 5,707 Earnings Per Share Earnings per share were calculated using the weighted average number of shares outstanding for the related period. The following table illustrates the computation of basic and diluted earnings per share: Schedule of computation of earnings per share Year Ended December 31, 2022 2021 2020 (In thousands, except per share data) Numerator: Numerator for basic and diluted earnings per share $ 85,983 $ 47,524 $ 21,677 Denominator: Denominator for basic earnings per share - weighted average number of common shares outstanding during the year 20,958 22,562 22,611 Incremental common shares attributable to exercise of outstanding options and warrants 5,631 3,218 1,392 Denominator for diluted earnings per share 26,589 25,780 24,003 Basic earnings per share $ 4.10 $ 2.11 $ 0.96 Diluted earnings per share $ 3.23 $ 1.84 $ 0.90 F- 14 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Incremental shares of 1.2 million , 5.7 million and 13.6 million related to stock options and warrants have been excluded from the diluted earnings per share calculation for the years ended December 31, 2022, 2021 and 2020, respectively, because the effect is anti-dilutive. Deferral and Amortization of Debt Issuance Costs Costs related to the issuance of debt are deferred and amortized using the interest method over the contractual or expected term of the related debt. Unamortized debt issuance costs are presented as a direct deduction to the carrying amount of the related debt on our Consolidated Balance Sheets. Income Taxes 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. We estimate a valuation allowance against that portion of the deferred tax asset whose utilization in future periods is not more than likely. Purchases of Company Stock We record purchases of our own common stock at cost and treat the shares as retired. Stock Option Plan The Company accounts for stock-based compensation in accordance with FASB ASC Topic 718, Compensation—Stock Compensation , that generally requires entities to recognize the cost of employee services received in exchange for awards of stock options, restricted stock or other equity instruments, based on the grant date fair value of those awards. Compensation cost is recognized for awards issued to employees based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options. This cost is recognized over the period which an employee is required to provide services in exchange for the award, generally the vesting period. 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. These are material estimates that could be susceptible to changes in the near term and, accordingly, actual results could differ from those estimates. F- 15 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Reclassification Certain amounts for the prior year have been reclassified to conform to the current year’s presentation with no effect on previously reported earnings or shareholders’ equity. Financial Covenant s Certain of our securitization transactions, our residual interest financing and our warehouse credit facilities contain various financial covenants requiring certain minimum financial ratios and results. Such covenants include maintaining minimum levels of liquidity and net worth and not exceeding maximum leverage levels. In addition, certain securitization and non-securitization related debt contain cross-default provisions that would allow certain creditors to declare a default if a default occurred under a different facility. As of December 31, 2022 we were in compliance with all such financial covenants. 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. We have recorded a liability as of December 31, 2022, which represents our estimate of the immaterial aggregate probable incurred losses for legal contingencies. The amount of losses that may ultimately be incurred, over and above such losses as are probable, cannot be estimated with certainty. (2) Restricted Cash Restricted cash consists of cash and cash equivalent accounts relating to our outstanding securitization trusts and credit facilities. The amount of restricted cash on our Consolidated Balance Sheets was $ 149.3 million and $ 146.6 million as of December 31, 2022 and 2021, respectively. Our securitization transactions and one of our warehouse credit facilities require that we establish cash reserves, or spread accounts, as additional credit enhancement. These cash reserves, which are included in restricted cash, were $ 56.8 million and $ 49.0 million as of December 31, 2022 and 2021, respectively. (3) 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. F- 16 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO 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. The following table presents the components of finance receivables, net of unearned interest: Schedule of finance receivables December 31, 2022 2021 Finance receivables (In thousands) Automobile finance receivables, net of unearned interest $ 92,304 $ 232,390 Unearned acquisition fees, discounts and deferred origination costs, net – – Finance receivables $ 92,304 $ 232,390 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 reported as delinquent. In certain circumstances we will grant obligors one-month payment extensions. 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. The following table summarizes the delinquency status of finance receivables as of December 31, 2022 and 2021: Schedule of amortized cost basis of finance receivables December 31, 2022 2021 Delinquency Status (In thousands) Current $ 65,764 $ 186,625 31-60 days 16,796 30,980 61-90 days 7,756 12,070 91 + days 1,988 2,715 $ 92,304 $ 232,390 Finance receivables totaling $ 2.0 million and $ 2.7 million at December 31, 2022 and 2021, respectively, 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. F- 17 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. Throughout our history we have observed how events such as extreme weather, political unrest, and other qualitative factors have influenced the performance of our portfolio. Consequently, we have considered how such qualitative factors may affect future credit losses and have incorporated our judgement of the effect of those factors into our estimates. The following table presents the amortized cost basis of our finance receivables by annual vintage as of December 31, 2022 and 2021: Schedule of amortized cost basis of finance receivables December 31, 2022 2021 (In thousands) Annual Vintage Pool 2012 and prior $ 33 $ 131 2013 231 1,091 2014 1,601 6,881 2015 8,627 29,695 2016 28,632 76,728 2017 53,180 117,864 Total amortized cost basis $ 92,304 $ 232,390 F- 18 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At the adoption of CECL, the Company recorded an addition to its allowance for finance credit losses of $ 127.0 million . In accordance with the rules for adopting CECL, the offset to the addition to the allowance for finance credit losses was a tax affected reduction to retained earnings using the modified retrospective method. The Company recorded a reduction to provision for credit losses on finance receivables in the amount of $ 28.1 million and $ 14.6 million for the years ended December 31, 2022, and 2021, respectively. The reserve decrease was primarily due to a decrease in lifetime expected credit losses resulting from improved credit performance, an improved macroeconomic outlook and higher used car prices. The Company made additional provisions for credit losses of $ 14.1 million for the year ended December 30, 2020. Those reserve increases were made in consideration for the uncertainty associated with the pandemic. The following table presents a summary of the activity for the allowance for finance credit losses, for the years ended December 31, 2022, 2021 and 2020: Schedule of allowance for finance credit losses December 31, 2022 2021 2020 (In thousands) Balance at beginning of year $ 56,206 $ 80,790 $ 11,640 Impact of adoption ASC 326 n/a n/a 127,000 Provision for credit losses on finance receivables ( 28,100 ) ( 14,590 ) 14,113 Charge-offs ( 18,319 ) ( 30,940 ) ( 90,824 ) Recoveries 11,966 20,946 18,861 Balance at end of year $ 21,753 $ 56,206 $ 80,790 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 on repossessed inventory: Schedule of allowance for losses on repossessed inventory December 31, 2022 2021 (In thousands) Gross balance of repossessions in inventory $ 1,894 $ 4,341 Allowance for losses on repossessed inventory ( 1,323 ) ( 1,871 ) Net repossessed inventory included in other assets $ 571 $ 2,470 F- 19 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (4) Furniture and Equipment The following table presents the components of furniture and equipment: Schedule of furniture and equipment December 31, 2022 2021 (In thousands) Furniture and fixtures $ 1,936 $ 1,936 Computer and telephone equipment 6,349 5,216 Leasehold improvements 1,570 1,507 9,855 8,659 Less: accumulated depreciation and amortization ( 8,195 ) ( 7,530 ) $ 1,660 $ 1,129 Depreciation expense totaled $ 1,618,000 , $ 1,675,000 , and $ 1,784,000 for the years ended December 31, 2022, 2021 and 2020, respectively. (5) Securitization Trust Debt We have completed numerous term securitization transactions that are structured as secured borrowings for financial accounting purposes. The debt issued in these transactions is shown on our Consolidated Balance Sheets as “Securitization trust debt,” and the components of such debt are summarized in the following table: F- 20 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Schedule of securitization trust debt Weighted Average Final Receivables Outstanding Outstanding Contractual Debt Scheduled Pledged at Principal at Principal at Interest Rate at Payment December 31, Initial December 31, December 31, December 31, 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 – 196,300 – 26,744 – CPS 2018-A March 2025 16,642 190,000 12,939 29,518 5.17 % CPS 2018-B December 2024 20,897 201,823 17,077 36,092 5.61 % CPS 2018-C September 2025 24,589 230,275 20,222 42,765 6.07 % CPS 2018-D June 2025 30,015 233,730 25,563 49,634 5.82 % CPS 2019-A March 2026 38,138 254,400 32,898 62,667 5.49 % CPS 2019-B June 2026 39,755 228,275 33,897 61,730 5.39 % CPS 2019-C September 2026 46,903 243,513 41,515 75,065 4.35 % CPS 2019-D December 2026 60,856 274,313 53,625 98,625 3.71 % CPS 2020-A March 2027 56,226 260,000 52,705 99,485 3.99 % CPS 2020-B June 2027 63,849 202,343 41,736 87,048 6.16 % CPS 2020-C November 2027 86,061 252,200 72,894 138,899 3.24 % CPS 2021-A March 2028 90,801 230,545 72,076 147,516 1.39 % CPS 2021-B June 2028 113,723 240,000 101,206 179,856 1.86 % CPS 2021-C September 2028 165,102 291,000 147,593 250,003 1.60 % CPS 2021-D December 2028 224,055 349,202 209,277 330,325 1.85 % CPS 2022-A April 2029 243,580 316,800 222,613 – 2.16 % CPS 2022-B October 2029 355,224 395,600 325,907 – 4.16 % CPS 2022-C April 2030 394,782 391,600 346,714 – 5.24 % CPS 2022-D August 2030 322,973 307,018 292,461 – 7.37 % $ 2,394,171 $ 5,945,252 $ 2,122,919 $ 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 $ 804.4 million in 2023, $ 578.9 million in 2024, $ 339.1 million in 2025, $ 202.3 million in 2026, $ 128.1 million in 2027, $ 55.3 million in 2028, and $ 0.6 million in 2029. (2) Includes repossessed assets that are included in Other Assets on our Consolidated Balance Sheets. F- 21 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Debt issuance costs of $ 14.2 million and $ 12.0 million as of December 31, 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 issued in private placement transactions to qualified institutional investors. The debt was issued by our wholly-owned, bankruptcy remote subsidiaries and is secured by the assets of such subsidiaries, but not by any of our other assets. The terms of the various securitization agreements related to the issuance of the securitization trust debt require that certain delinquency and credit loss criteria be met with respect to the collateral pool, and require that we maintain minimum levels of liquidity and net worth and not exceed maximum leverage levels. We were in compliance with all such covenants as of December 31, 2022. We are responsible for the administration and collection of the contracts. The securitization agreements also require certain funds be held in restricted cash accounts to provide additional credit enhancement for the Notes or to be applied to make payments on the securitization trust debt. As of December 31, 2022, restricted cash under the various agreements totaled approximately $ 149.3 million . Interest expense on the securitization trust debt is composed of the stated rate of interest plus amortization of additional costs of borrowing. Additional costs of borrowing include facility fees, insurance premiums, amortization of deferred financing costs, and amortization of discounts required on the notes at the time of issuance. Deferred financing costs related to the securitization trust debt are amortized using the interest method. Accordingly, the effective cost of borrowing of the securitization trust debt is greater than the stated rate of interest. 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 warehouse line of credit. 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 any of our other creditors. F- 22 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (6) Debt The terms of our debt outstanding at December 31, 2022 and 2021 are summarized below: Schedule of debt outstanding Amount Outstanding at December 31, December 31, 2022 2021 (In thousands) Description Interest Rate Maturity Warehouse lines of credit 3.00% over CP yield rate (Minimum 3.75%) 7.48% and 3.75% at December 31, 2022 and December 31 2021, respectively July 2024 $ 150,293 $ 70,590 4.15% over a commercial paper rate (Minimum 5.15%) 8.60% and 5.15% at December 31 2022, and December 31 2021, respectively January 2024 137,585 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 7.82 % and 8.93 % at December 31, 2022 and December 31, 2021, respectively Weighted average maturity of October 2024 and January 2024 at December 31, 2022 and December 31, 2021, respectively 25,263 26,459 $ 363,141 $ 186,780 F- 23 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Debt issuance costs of $ 2.6 million and $ 400,000 as of December 31, 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 Warehouse lines of credit and residual interest financing on our Consolidated Balance Sheets. On May 11, 2012, we entered into a $ 100 million one-year warehouse credit line with Citibank, N.A. The facility is structured to allow us to fund a portion of the purchase price of automobile contracts by borrowing from a credit facility to our consolidated subsidiary Page Eight Funding, LLC. The facility provides for effective advances up to 86.0% of eligible finance receivables. The Class A loans under the facility generally accrue interest during the revolving period at a per annum rate equal to one-month SOFR plus 3.00% per annum, with a minimum rate of 3.75% per annum and during the amortization period at a per annum rate equal to one-month SOFR plus 4.00% per annum, with a minimum rate of 4.75% per annum. The Class B loans under the facility generally accrue interest during the revolving period at a per annum rate equal to 8.50% per annum and during the amortization period at a per annum rate equal to 9.50% per annum. In July 2022, we renewed our two-year revolving credit agreement with Citibank, N.A., and doubled the capacity from $100 million to $200 million. This facility was amended to extend the revolving period to July 2024 and to include an amortization period through July 2025 for any receivables pledged to the facility at the end of the revolving period. At December 31, 2022 there was $ 150.3 million outstanding under this facility. On February 2, 2022, we renewed our two-year revolving credit agreement with Ares Agent Services, L.P. The facility is structured to allow us to fund a portion of the purchase price of automobile contracts by borrowing from a credit facility to our consolidated subsidiary Page Nine Funding, LLC. The facility provides for effective advances up to 88.00% of eligible finance receivables. The loans under the facility accrue interest at a commercial paper rate plus 4.15% per annum, with a minimum rate of 5.15% per annum. In June 2022, we increased the capacity of our credit agreement with Ares Agent Services, L.P. from $100 million to $200 million. This facility was amended to extend the revolving period to January 2024 followed by an amortization period through January 2028 for any receivables pledged to the facility at the end of the revolving period. At December 31, 2022 there was $ 137.6 million outstanding under this facility. The total outstanding debt on our two warehouse lines of credit was $ 287.9 million as of December 31, 2022, compared to $ 106.0 million outstanding as of December 31, 2021. On June 30, 2021, we completed a $ 50 million securitization of residual interests from previously issued securitizations. In this residual interest financing transaction, qualified institutional buyers purchased $ 50.0 million of asset-backed notes secured by residual interests in eleven CPS securitizations consecutively issued from January 2018 and September 2020. The sold notes (“2021-1 Notes”), issued by CPS Auto Securitization Trust 2021-1, consist of a single class with a coupon of 7.86%. At December 31, 2022 there was $ 50.0 million outstanding under this facility. The agreed valuation of the collateral for the 2018-1 and 2021-1 Notes is the sum of the amounts on deposit in the underlying spread accounts for each related securitization and the over-collateralization of each related securitization, which is the difference between the outstanding principal balances of the related receivables less the principal balance of the outstanding notes issued in the related securitization. On each monthly payment date, the 2018-1 and 2021-1 Notes are entitled to interest at the coupon rate and, if necessary, a principal payment necessary to maintain a specified minimum collateral ratio. Unamortized debt issuance costs of $ 377,000 and $ 629,000 as of December 31, 2022 and December 31, 2021, respectively, have been excluded from the amount reported above for residual interest financing. These debt issuance costs are presented as a direct deduction to the carrying amount of the debt on our Consolidated Balance Sheets. F- 24 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS We must comply with certain affirmative and negative covenants related to debt facilities, which require, among other things, that we maintain certain financial ratios related to liquidity, net worth and capitalization. Further covenants include matters relating to investments, acquisitions, restricted payments and certain dividend restrictions. See the discussion of financial covenants in Note 1. The following table summarizes the contractual and expected maturity amounts of our outstanding subordinated renewable notes as of December 31, 2022: Schedule of expected maturity amounts for long-term debt Subordinated Contractual maturity renewable date notes (In thousands) 2023 $ 13,800 2024 2,798 2025 3,146 2026 3,264 2027 837 Thereafter 1,418 Total $ 25,263 (7) Shareholders’ Equity Common Stock Holders of common stock are entitled to such dividends as our board of directors, in its discretion, may declare out of funds available, subject to the terms of any outstanding shares of preferred stock and other restrictions. In the event of liquidation of the Company, holders of common stock are entitled to receive, pro rata , all of the assets of the Company available for distribution, after payment of any liquidation preference to the holders of outstanding shares of preferred stock. Holders of the shares of common stock have no conversion or preemptive or other subscription rights and there are no redemption or sinking fund provisions applicable to the common stock. Stock Purchases For the year ending December 31, 2022, we purchased 4,139,664 shares of our common stock at an average price of $ 11.11 . In January, March, and July 2022 our board of directors authorized the repurchase of up to $ 35.0 million of our common stock. There is approximately $ 8.3 million of board authorization remaining under such plans, which have no expiration date. The table below describes the purchase of our common stock for the twelve-month period ended December 31, 2022 and 2021: Schedule of stock purchases Twelve Months Ended December 31, 2022 December 31, 2021 Shares Avg. Price Shares Avg. Price Open market purchases 3,246,511 $ 10.44 1,639,138 $ 6.98 Shares redeemed upon net exercise of stock options 893,153 13.56 245,743 6.95 Other – – 1,999,995 6.26 Total stock purchases 4,139,664 $ 11.11 3,884,876 $ 3.97 F- 25 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Options and Warrants In 2006, the Company adopted and its shareholders approved the CPS 2006 Long-Term Equity Incentive Plan (the “2006 Plan”) pursuant to which our Board of Directors, or a duly-authorized committee thereof, may grant stock options, restricted stock, restricted stock units and stock appreciation rights to our employees or employees of our subsidiaries, to directors of the Company, and to individuals acting as consultants to the Company or its subsidiaries. In June 2008, May 2012, April 2013, May 2015, July 2018 and again in November 2021, the shareholders of the Company approved an amendment to the 2006 Plan to increase the maximum number of shares that may be subject to awards under the 2006 Plan to 5,000,000, 7,200,000, 12,200,000, 17,200,000, 19,200,000 and 22,200,000 , respectively, in each case plus shares authorized under prior plans and not issued. Options that have been granted under the 2006 Plan and a previous plan approved in 1997 have been granted at an exercise price equal to (or greater than) the stock’s fair value at the date of the grant, with terms generally of 7-10 years and vesting generally over 4-5 years. The per share weighted-average fair value of stock options granted during the years ended December 31, 2022, 2021 and 2020 was $ 5.42 , $ 2.65 , and $ 1.33 , respectively. That fair value was estimated using a binomial option pricing model using the weighted average assumptions noted in the following table. We use historical data to estimate the expected term of each option. The volatility estimate is based on the historical and implied volatility of our stock over the period that equals the expected life of the option. Volatility assumptions ranged from 75 % to 80 % for 2022, 79 % to 71 % for 2021, and 72 % to 80 % for 2020. The risk-free interest rate is based on the yield on a U.S. Treasury bond with a maturity comparable to the expected life of the option. The dividend yield is estimated to be zero based on our intention not to issue dividends for the foreseeable future. Schedule of assumptions for stock options Year Ended December 31, 2022 2021 2020 Expected life (years) 4.00 4.00 4.01 Risk-free interest rate 2.38 % 0.49 % 0.25 % Volatility 76 % 72 % 73 % Expected dividend yield – – – For the years ended December 31, 2022, 2021 and 2020, we recorded stock-based compensation costs in the amount of $ 4.4 million , $ 2.0 million and $ 1.9 million , respectively. As of December 31, 2022, the unrecognized stock-based compensation costs to be recognized over future periods was equal to $ 9.5 million . This amount will be recognized as expense over a weighted-average period of 2.5 years. At December 31, 2022 and 2021, options outstanding had intrinsic values of $ 11.2 million and $ 13.1 million , respectively. At December 31, 2022 and 2021, options exercisable had intrinsic values of $ 7.8 million and $ 9.7 million , respectively. The total intrinsic value of options exercised was $ 23.4 million and $ 9.0 million for the years ended December 31, 2022 and 2021, respectively. New shares were issued for all options exercised during the year ended December 2022 and cash of $ 15.3 million was received. At December 31, 2022, there were a total of 2,661,000 additional shares available for grant under the 2006 Plan. F- 26 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stock option activity for the year ended December 31, 2022 for stock options under the 2006 and 1997 plans is as follows: Schedule of 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 ( 3,128 ) 4.89 N/A Forfeited/Expired ( 490 ) 7.07 N/A Options outstanding at the end of period 11,167 $ 5.21 3.15 years Options exercisable at the end of period 7,770 $ 4.56 2.12 years The following table presents the price distribution of stock options outstanding and exercisable for the years ended December 31, 2022 and 2021: Schedule of options outstanding and exercisable Number of shares as of Number of shares as of December 31, 2022 December 31, 2021 Outstanding Exercisable Outstanding Exercisable (In thousands) (In thousands) Range of exercise prices: $0.95 - $1.99 – – 577 577 $2.00 - $2.99 1,445 775 1,517 489 $3.00 - $3.99 3,785 3,495 4,285 3,382 $4.00 - $4.99 2,739 1,802 2,870 1,410 $5.00 - $5.99 – – – – $6.00 - $6.99 740 740 2,651 2,652 $7.00 - $7.99 748 748 1,175 1,175 $10.00 - $10.99 1,710 210 – – Total shares 11,167 7,770 13,075 9,685 We did not issue any stock options with an exercise price above or below the market price of the stock on the grant date for the years ended December 31, 2022, 2021 and 2020. F- 27 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (8) Interest Income and Interest Expense The following table presents the components of interest income: Schedule of interest income Year Ended December 31, 2022 2021 2020 (In thousands) Interest on finance receivables $ 35,091 $ 69,783 $ 126,043 Interest on finance receivables at fair value 268,621 196,461 168,266 Mark to finance receivables measured at fair value 15,283 ( 4,417 ) ( 29,528 ) Other interest income 1,525 22 673 Interest income $ 320,520 $ 261,849 $ 265,454 The following table presents the components of interest expense: Schedule of interest expense Year Ended December 31, 2022 2021 2020 (In thousands) Securitization trust debt $ 70,627 $ 64,387 $ 88,031 Warehouse lines of credit 10,310 4,448 7,678 Residual interest financing 4,243 3,763 3,454 Subordinated renewable notes 2,344 2,641 2,175 Interest expense $ 87,524 $ 75,239 $ 101,338 (9) Income Taxes Income taxes consist of the following: Schedule of income tax expense Year Ended December 31, 2022 2021 2020 (In thousands) Current federal tax expense $ 16,946 $ 8,992 $ ( 23,576 ) Current state tax expense 3,352 2,845 472 Deferred federal tax expense 5,573 3,012 18,937 Deferred state tax expense 4,339 3,373 2,610 Income tax expense $ 30,210 $ 18,222 $ ( 1,557 ) F- 28 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Income tax expense for the years ended December 31, 2022, 2021 and 2020 differs from the amount determined by applying the statutory federal rate to income before income taxes as follows: Schedule of reconciliation of income taxes Year Ended December 31, 2022 2021 2020 (In thousands) Expense at federal tax rate $ 24,401 $ 13,807 $ 4,225 State taxes, net of federal income tax effect 6,462 3,974 1,505 Stock-based compensation ( 2,611 ) ( 947 ) 35 Non-deductible expenses 1,056 1,129 974 Net operating loss carryback – ( 1,694 ) ( 9,435 ) Effect of change in tax rate – – – Accounting method change – – – Other 902 1,953 1,139 Income tax expense $ 30,210 $ 18,222 $ ( 1,557 ) The tax effected cumulative temporary differences that give rise to deferred tax assets and liabilities as of December 31, 2022 and 2021 are as follows: Schedule of deferred tax assets and liabilities December 31, 2022 2021 (In thousands) Deferred Tax Assets: Finance receivables $ 4,870 $ 10,644 Accrued liabilities 1,708 1,694 NOL carryforwards 450 2,070 Built in losses 2,024 2,679 Pension accrual – – Stock compensation 2,172 3,584 Lease liability 1,711 2,737 Other – – Total deferred tax assets $ 12,935 $ 23,408 Deferred Tax Liabilities: Finance receivables $ – $ – Deferred loan costs – – Pension accrual ( 752 ) ( 1,026 ) Lease right-of-use assets ( 1,572 ) ( 2,487 ) Furniture and equipment and other ( 434 ) ( 320 ) Total deferred tax liabilities ( 2,758 ) ( 3,833 ) Net deferred tax asset $ 10,177 $ 19,575 F- 29 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS We acquired certain net operating losses and built-in loss assets as part of our acquisitions of MFN Financial Corp. (“MFN”) in 2002 and TFC Enterprises, Inc. (“TFC”) in 2003. Moreover, both MFN and TFC have undergone an ownership change for purposes of Internal Revenue Code (“IRC”) Section 382. In general, IRC Section 382 imposes an annual limitation on the ability of a loss corporation (that is, a corporation with a net operating loss (“NOL”) carryforward, credit carryforward, or certain built-in losses (“BILs”)) to utilize its pre-change NOL carryforwards or BILs to offset taxable income arising after an ownership change. In determining the possible future realization of deferred tax assets, we have considered future taxable income from the following sources: (a) reversal of taxable temporary differences; and (b) tax planning strategies that, if necessary, would be implemented to accelerate taxable income into years in which net operating losses might otherwise expire. 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 judgements, 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 $ 10.2 million as of December 31, 2022 is more likely than not based on forecasted future net earnings. Our net deferred tax asset of $10.2 million consists of approximately $ 7.0 million of net U.S. federal deferred tax assets and $ 3.2 million of net state deferred tax assets. As of December 31, 2022, we had net operating loss carryforwards for state income tax purposes of $ 42.4 million . These state net operating losses begin to expire in 2023. We recognize a tax position as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. We recognize potential interest and penalties related to unrecognized tax benefits as income tax expense. At December 31, 2022, we had no unrecognized tax benefits for uncertain tax positions. We are subject to taxation in the US and various state jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state, or local examinations by tax authorities for years before 2018. (10) Commitments and Contingencies 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. We determine if a contract contains a lease at contract inception. Right-of-use assets and liabilities are recognized based on the present value of lease payments over the lease term. In determining the present value of lease payments, we use the Company’s incremental borrowing rate. Right-of-use assets are included in other assets and lease liabilities are included in accounts payable and accrued expenses in our Condensed Consolidated Balance Sheet. F- 30 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table presents the supplemental balance sheet information related to leases: Supplemental balance sheet information related to leases December 31, December 31, 2022 2021 (In thousands) Operating Leases Operating lease right-of-use assets $ 28,397 $ 25,819 Less: Accumulated amortization right-of-use assets ( 22,613 ) ( 17,624 ) Operating lease right-of-use assets, net $ 5,784 $ 8,195 Operating lease liabilities $ ( 6,234 ) $ ( 9,058 ) Finance Leases Property and equipment, at cost $ 3,407 $ 3,407 Less: Accumulated depreciation ( 3,301 ) ( 2,348 ) Property and equipment, net $ 106 $ 1,059 Finance lease liabilities $ ( 177 ) $ ( 1,124 ) Weighted Average Discount Rate Operating lease 5.0 % 5.0 % Finance lease 6.5 % 6.5 % Maturities of leases Maturities of lease liabilities were as follows: (In thousands) Operating Finance Year Ending December 31, Lease Lease 2023 $ 4,378 $ 147 2024 1,544 26 2025 794 9 2026 501 – 2027 509 – Thereafter 650 – Total undiscounted lease payments 8,376 182 Less amounts representing interest ( 2,142 ) ( 5 ) Lease Liability $ 6,234 $ 177 F- 31 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table presents the leases expense included in Occupancy, General and administrative on our Condensed Consolidated Statement of Operations: Schedule of lease cost Year Ended December 31, 2022 2021 2020 (In thousands) Operating lease cost $ 6,650 $ 7,184 $ 7,523 Finance lease cost 987 1,229 1,179 Total lease cost $ 7,637 $ 8,413 $ 8,702 The following table presents the supplemental cash flow information related to leases: Supplemental cash flow information related to leases Year Ended December 31, 2022 2021 2020 (In thousands) Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 7,056 $ 7,474 $ 7,762 Operating cash flows from finance leases 948 1,118 1,007 Financing cash flows from finance leases 40 111 172 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. 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. F- 32 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. 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 December 31, 2022, our best estimate of probable incurred losses for legal contingencies, including the matters identified above. 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 December 31, 2022 is $ 4.9 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 December 31, 2022 does not exceed $ 11.2 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. (11) Employee Benefits We sponsor a pretax savings and profit sharing plan (the “401(k) Plan”) qualified under Section 401(k) of the Internal Revenue Code. Under the 401(k) Plan, eligible employees are able to contribute up to the maximum allowed under the law. We may, at our discretion, match 100% of employees’ contributions up to $ 2,000 per employee per calendar year. Our matching contributions to the 401(k) Plan were $ 1.3 million , $ 1.3 million , and $ 1.4 million respectively, for the years ended December 31, 2022, 2021 and 2020. We also sponsor a defined benefit plan, the MFN Financial Corporation Pension Plan (the “Plan”). The Plan benefits were frozen on June 30, 2001. F- 33 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following tables represents a reconciliation of the change in the plan’s benefit obligations, fair value of plan assets, and funded status at December 31, 2022 and 2021: Schedule of reconciliation of the change in the plan's benefit obligations December 31, 2022 2021 (In thousands) Change in Projected Benefit Obligation Projected benefit obligation, beginning of year $ 22,280 $ 24,678 Interest cost 579 553 Assumption changes ( 5,450 ) ( 1,074 ) Actuarial (gain) loss 85 ( 222 ) Settlements ( 716 ) ( 865 ) Benefits paid ( 826 ) ( 790 ) Projected benefit obligation, end of year $ 15,952 $ 22,280 Change in Plan Assets Fair value of plan assets, beginning of year $ 26,098 $ 18,165 Return on assets ( 5,702 ) 8,703 Employer contribution – 1,124 Expenses ( 86 ) ( 239 ) Settlements ( 716 ) ( 865 ) Benefits paid ( 826 ) ( 790 ) Fair value of plan assets, end of year $ 18,768 $ 26,098 Funded Status at end of year $ 2,816 $ 3,818 F- 34 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Additional Information Weighted average assumptions used to determine benefit obligations and cost at December 31, 2022 and 2021 were as follows: Schedule of weighted average assumptions used to determine pension benefit obligations December, 31 2022 2021 Weighted average assumptions used to determine benefit obligations Discount rate 4.87 % 2.65 % Weighted average assumptions used to determine net periodic benefit cost Discount rate 2.65 % 2.28 % Expected return on plan assets 7.25 % 7.25 % Our overall expected long-term rate of return on assets is 7.25 % per annum as of December 31, 2022. The expected long-term rate of return is based on the weighted average of historical returns on individual asset categories, which are described in more detail below. Schedule of components of net periodic benefit cost December 31, 2022 2021 2020 (In thousands) Amounts recognized on Consolidated Balance Sheet Other assets $ 2,816 $ 3,818 $ – Other liabilities – – ( 6,513 ) Net amount recognized $ 2,816 $ 3,818 $ ( 6,513 ) Amounts recognized in accumulated other comprehensive loss consists of: Net loss $ 5,716 $ 3,794 $ 13,297 Unrecognized transition asset – – – Net amount recognized $ 5,716 $ 3,794 $ 13,297 Components of net periodic benefit cost Interest cost $ 579 $ 553 $ 693 Expected return on assets ( 1,860 ) ( 1,301 ) ( 1,150 ) Amortization of transition asset – – – Amortization of net loss 105 896 839 Net periodic benefit cost ( 1,176 ) 148 382 Settlement (gain)/loss 256 ( 865 ) – Total $ ( 920 ) $ ( 717 ) $ 382 Benefit Obligation Recognized in Other Comprehensive Loss (Income) Net loss (gain) $ 1,003 $ ( 9,503 ) $ 205 Prior service cost (credit) – – – Amortization of prior service cost – – – Net amount recognized in other comprehensive loss (income) $ 1,003 $ ( 9,503 ) $ 205 F- 35 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The estimated net gain that will be amortized from accumulated other comprehensive income into net periodic benefit cost in 2023 is $ 169,000 . The weighted average asset allocation of our pension benefits at December 31, 2022 and 2021 were as follows: Schedule of weighted average asset allocation of our pension benefits December 31, 2022 2021 Weighted Average Asset Allocation at Year-End Asset Category Equity securities 87 % 78 % Debt securities 13 % 22 % Cash and cash equivalents 0 % 0 % Total 100 % 100 % Our investment policies and strategies for the pension benefits plan utilize a target allocation of 75% equity securities and 25% fixed income securities (excluding Company stock). Our investment goals are to maximize returns subject to specific risk management policies. We address risk management and diversification by the use of a professional investment advisor and several sub-advisors which invest in domestic and international equity securities and domestic fixed income securities. Each sub-advisor focuses its investments within a specific sector of the equity or fixed income market. For the sub-advisors focused on the equity markets, the sectors are differentiated by the market capitalization, the relative valuation and the location of the underlying issuer. For the sub-advisors focused on the fixed income markets, the sectors are differentiated by the credit quality and the maturity of the underlying fixed income investment. The investments made by the sub-advisors are readily marketable and can be sold to fund benefit payment obligations as they become payable. Cash Flows Schedule of estimated Future Benefit Payments Estimated Future Benefit Payments (In thousands) 2023 $ 990 2024 1,329 2025 1,315 2026 1,392 2027 1,265 Years 2028 - 2032 5,954 Anticipated Contributions in 2023 $ – F- 36 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The fair value of plan assets at December 31, 2022 and 2021, by asset category, is as follows: Schedule of fair value of plan assets December 31, 2022 Level 1 (1) Level 2 (2) Level 3 (3) Total Investment Name: (in thousands) Company Common Stock $ 7,848 $ – $ – $ 7,848 Large Cap Value – 2,037 – 2,037 Mid Cap Index – 594 – 594 Small Cap Growth – 546 – 546 Small Cap Value – 588 – 588 Large Cap Blend – 560 – 560 Growth – 1,843 – 1,843 International Growth – 2,251 – 2,251 Core Bond – 1,658 – 1,658 High Yield – 347 – 347 Inflation Protected Bond – 433 – 433 Money Market – 63 – 63 Total $ 7,848 $ 10,920 $ – $ 18,768 December 31, 2021 Level 1 (1) Level 2 (2) Level 3 (3) Total Investment Name: (in thousands) Company Common Stock $ 10,472 $ – $ – $ 10,472 Large Cap Value – 2,933 – 2,933 Mid Cap Index – 836 – 836 Small Cap Growth – 714 – 714 Small Cap Value – 868 – 868 Large Cap Blend – 859 – 859 Growth – 2,915 – 2,915 International Growth – 3,036 – 3,036 Core Bond – 2,316 – 2,316 High Yield – 473 – 473 Inflation Protected Bond – 641 – 641 Money Market – 35 – 35 Total $ 10,472 $ 15,626 $ – $ 26,098 ________________________ (1) Company common stock is classified as level 1 and valued using quoted prices in active markets for identical assets. (2) All other plan assets in stock, bond and money market funds are classified as level 2 and valued using significant observable inputs. (3) There are no plan assets classified as level 3 in the fair value hierarchy as a result of having significant unobservable inputs. F- 37 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (12) 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 are 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 impact on our fair value measurement. 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 Twelve Months Ended December 31, 2022 2021 (In thousands) Balance at beginning of period $ 1,749,098 $ 1,523,726 Finance receivables at fair value acquired during period 1,673,166 1,107,537 Payments received on finance receivables at fair value ( 825,783 ) ( 743,728 ) Net interest income accretion on fair value receivables ( 135,147 ) ( 134,020 ) Mark to fair value 15,283 ( 4,417 ) Balance at end of period $ 2,476,617 $ 1,749,098 F- 38 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The table below compares the fair values of these finance receivables to their contractual balances for the periods shown: Schedule of finance receivables to their contractual balances December 31, 2022 December 31, 2021 Contractual Fair Contractual Fair Balance Value Balance Value (In thousands) Finance receivables measured at fair value $ 2,701,184 $ 2,476,617 $ 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 December 31, December 31, 2022 2021 Unobservable Inputs 2022 2021 (In thousands) Assets: Finance receivables measured at fair value $ 2,476,617 $ 1,749,098 Discount rate 11.0%-11.3% 10.6% - 11.3% Cumulative net losses 13.4%-19.4% 10.0% - 18.4% The following table summarizes the delinquency status using the contractual balance of these finance receivables measured at fair value as of December 31, 2022 and December 31, 2021: Schedule of delinquency status of finance receivables measured at fair value December 31, December 31, 2022 2021 (In thousands) Delinquency Status Current $ 2,375,271 $ 1,787,641 31 - 60 days 184,968 115,924 61 - 90 days 72,390 38,999 91 + days 29,048 11,564 Repo 39,507 18,571 $ 2,701,184 $ 1,972,699 F- 39 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Repossessed vehicle inventory, which is included in Other assets on our consolidated balance sheet, is measured at fair value using level 2 assumptions based on our actual loss experience on sale of repossessed vehicles. At December 31, 2022, the finance receivables related to the repossessed vehicles in inventory totaled $ 1.9 million . We have applied a valuation adjustment, or loss allowance, of $ 1.3 million , which is based on a recovery rate of approximately 30 %, resulting in an estimated fair value and carrying amount of $ 571,000 . The fair value and carrying amount of the repossessed inventory at December 31, 2021 was $ 2.5 million after applying a valuation adjustment of $ 1.9 million . There were no transfers in or out of level 1 or level 2 assets and liabilities for 2022 and 2021. We have no level 3 assets or liabilities that are measured at fair value on a non-recurring basis. The estimated fair values of financial assets and liabilities at December 31, 2022 and 2021, were as follows: Schedule of fair values of financial assets and liabilities As of December 31, 2022 Financial Instrument (In thousands) Carrying Fair Value Measurements Using: Value Level 1 Level 2 Level 3 Total Assets: Cash and cash equivalents $ 13,490 $ 13,490 $ – $ – $ 13,490 Restricted cash and equivalents 149,299 149,299 – – 149,299 Finance receivables, net 70,551 – – 60,063 60,063 Accrued interest receivable 649 – – 649 649 Liabilities: Warehouse lines of credit $ 285,328 $ – $ – $ 285,328 $ 285,328 Accrued interest payable 6,190 – – 6,190 6,190 Securitization trust debt 2,108,744 – – 1,957,995 1,957,995 Subordinated renewable notes 25,263 – – 25,263 25,263 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 F- 40 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13) Subsequent Events On January 25, 2023 we executed our first securitization of 2023. In the transaction, qualified institutional buyers purchased $324.8 million of asset-backed notes secured by $362.9 million in automobile receivables originated by CPS. The sold notes, issued by CPS Auto Receivables Trust 2023-A, 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 6.82%. The 2023-A transaction has initial credit enhancement consisting of a cash deposit equal to 1.00% of the original receivable pool balance and overcollateralization of 10.50%. The transaction agreements require accelerated payment of principal on the notes to reach overcollateralization of the lesser of 14.00% of the original receivable pool balance, or 38.00% of the then outstanding pool balance. The transaction was a private offering of securities, not registered under the Securities Act of 1933, or any state securities law. F- 41