CONSUMER PORTFOLIO SERVICES, INC. 10-Q

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2023 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number: 1-11416 CONSUMER PORTFOLIO SERVICES, INC. (Exact name of registrant as specified in its charter) California 33-0459135 (State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.) 3800 Howard Hughes Parkway , Suite 1400 , Las Vegas , Nevada 89169 (Address of principal executive offices) (Zip Code) Registrant’s telephone number, including Area Code: (949) 753-6800 Former name, former address and former fiscal year, if changed since last report: N/A Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Trading Symbol Name of Each Exchange on Which Registered Common Stock, no par value CPSS The NASDAQ Stock Market LLC (Global Market) Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large Accelerated Filer ☐ Accelerated Filer ☒ Non-Accelerated Filer ☐ Smaller Reporting Company ☒ Emerging Growth Company ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ As of May 5, 2023 the registrant had 20,777,911 common shares outstanding. CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES INDEX TO FORM 10-Q For the Quarterly Period Ended March 31, 2023 Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Unaudited Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022 3 Unaudited Condensed Consolidated Statements of Operations for the three-month periods ended March 31, 2023 and 2022 4 Unaudited Condensed Consolidated Statements of Comprehensive Income for the three-month periods ended March 31, 2023 and 2022 5 Unaudited Condensed Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2023 and 2022 6 Unaudited Condensed Consolidated Statements of Shareholders’ Equity for the three-month periods ended March 31, 2023 and 2022 7 Notes to Unaudited Condensed Consolidated Financial Statements 8 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 23 Item 4. Controls and Procedures 34 PART II. OTHER INFORMATION Item 1. Legal Proceedings 35 Item 1A. Risk Factors 35 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 37 Item 6. Exhibits 37 Signatures 38 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) March 31, December 31, 2023 2022 ASSETS Cash and cash equivalents $ 10,188 $ 13,490 Restricted cash and equivalents 158,895 149,299 Finance receivables measured at fair value 2,575,117 2,476,617 Finance receivables 69,533 92,304 Less: Allowance for finance credit losses ( 14,728 ) ( 21,753 ) Finance receivables, net 54,805 70,551 Furniture and equipment, net 1,463 1,660 Deferred tax assets, net 9,792 10,177 Other assets 26,362 30,974 Total Assets $ 2,836,622 $ 2,752,768 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Accounts payable and accrued expenses $ 59,825 $ 55,421 Warehouse lines of credit 285,809 285,328 Residual interest financing 49,686 49,623 Securitization trust debt 2,175,068 2,108,744 Subordinated renewable notes 23,443 25,263 Total liabilities 2,593,831 2,524,379 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; 20,496,144 and 20,131,323 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively 29,485 28,906 Retained earnings 216,337 202,514 Accumulated other comprehensive loss ( 3,031 ) ( 3,031 ) Total stockholders’ equity 242,791 228,389 Total liability and stockholder’ equity $ 2,836,622 $ 2,752,768 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 3 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) Three Months Ended March 31, 2023 2022 Revenues: Interest income $ 80,062 $ 70,060 Mark to finance receivables measured at fair value – 2,400 Other income 3,038 1,906 Total revenues 83,100 74,366 Expenses: Employee costs 22,033 22,152 General and administrative 11,396 8,231 Interest 32,759 16,400 Provision for credit losses ( 9,000 ) ( 9,400 ) Sales 5,724 5,386 Occupancy 1,526 1,852 Depreciation and amortization 231 417 Total operating expenses 64,669 45,038 Income before income tax expense 18,431 29,328 Income tax expense 4,608 8,213 Net income $ 13,823 $ 21,115 Earnings per share: Basic $ 0.68 $ 0.99 Diluted 0.54 0.75 Number of shares used in computing earnings per share: Basic 20,418 21,221 Diluted 25,392 28,197 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 4 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) Three Months Ended March 31, 2023 2022 Net income $ 13,823 $ 21,115 Other comprehensive income/(loss); change in funded status of pension plan – – Comprehensive income $ 13,823 $ 21,115 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 5 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Three Months Ended March 31, 2023 2022 Cash flows from operating activities: Net income $ 13,823 $ 21,115 Adjustments to reconcile net income to net cash provided by operating activities: Net interest income accretion on fair value receivables 47,472 31,204 Depreciation and amortization 231 417 Amortization of deferred financing costs 2,403 1,782 Mark to finance receivables measured at fair value – ( 2,400 ) Provision for credit losses ( 9,000 ) ( 9,400 ) Stock-based compensation expense 912 790 Changes in assets and liabilities: Deferred tax assets, net 385 662 Other assets 4,511 10,790 Accounts payable and accrued expenses 4,404 13,340 Net cash provided by operating activities 65,141 68,300 Cash flows from investing activities: Payments received on finance receivables held for investment 24,746 43,840 Purchases of finance receivables measured at fair value ( 352,598 ) ( 393,407 ) Payments received on finance receivables at fair value 206,626 209,844 Change in repossessions held in inventory 101 481 Purchase of furniture and equipment ( 34 ) ( 275 ) Net cash used in investing activities ( 121,159 ) ( 139,517 ) Cash flows from financing activities: Proceeds from issuance of securitization trust debt 324,768 316,800 Proceeds from issuance of subordinated renewable notes – 1,059 Payments on subordinated renewable notes ( 1,820 ) ( 762 ) Net proceeds from (repayments of) warehouse lines of credit ( 7 ) 42,170 Net Proceeds from (repayment of) residual interest financing debt – ( 4,311 ) Repayment of securitization trust debt ( 258,224 ) ( 262,737 ) Payment of financing costs ( 2,072 ) ( 3,030 ) Purchase of common stock ( 7,293 ) ( 14,104 ) Exercise of options and warrants 6,960 5,860 Net cash provided by financing activities 62,312 80,945 Increase in cash and cash equivalents 6,294 9,728 Cash and restricted cash at beginning of period 162,789 176,548 Cash and restricted cash at end of period $ 169,083 $ 186,276 Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 29,658 $ 14,380 Income taxes $ 25 $ – See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 6 CONSUMER PORTFOLIO SERVICES, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (In thousands) Three Months Ended March 31, 2023 2022 Common Stock (Shares Outstanding) Balance, beginning of period 20,131 21,144 Common stock issued upon exercise of options and warrants 1,086 1,366 Repurchase of common stock ( 721 ) ( 1,218 ) Balance, end of period 20,496 21,292 Common Stock Balance, beginning of period $ 28,906 $ 55,298 Common stock issued upon exercise of options and warrants 6,960 5,860 Repurchase of common stock ( 7,293 ) ( 14,104 ) Stock-based compensation 912 790 Balance, end of period $ 29,485 $ 47,844 Retained Earnings Balance, beginning of period $ 202,514 $ 116,531 Net income 13,823 21,115 Balance, end of period $ 216,337 $ 137,646 Accumulated Other Comprehensive Loss Balance, beginning of period $ ( 3,031 ) $ ( 1,622 ) Pension benefit obligation – – Balance, end of period $ ( 3,031 ) $ ( 1,622 ) Balance, beginning of period 228,389 – Pension benefit obligation – – Total Shareholders' Equity $ 242,791 $ 183,868 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 7 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies Description of Business We were formed in California on March 8, 1991. We specialize in purchasing and servicing retail automobile installment sale contracts (“automobile contracts” or “finance receivables”) originated by licensed motor vehicle dealers located throughout the United States (“dealers”) in the sale of new and used automobiles, light trucks and passenger vans. Through our purchases, we provide indirect financing to dealer customers for borrowers with limited credit histories or past credit problems (“sub-prime customers”). We serve as an alternative source of financing for dealers, allowing sales to customers who otherwise might not be able to obtain financing. In addition to purchasing installment purchase contracts directly from dealers, we have also (i) lent money directly to consumers for loans secured by vehicles, (ii) purchased immaterial amounts of vehicle purchase money loans from non-affiliated lenders, and (iii) acquired installment purchase contracts in four merger and acquisition transactions. In this report, we refer to all of such contracts and loans as “automobile contracts.” Basis of Presentation Our Unaudited Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America, with the instructions to Form 10-Q and with Article 10 of Regulation S-X of the Securities and Exchange Commission, and include all adjustments that are, in management’s opinion, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are, in the opinion of management, of a normal recurring nature. Results for the three-month period ended March 31, 2023 are not necessarily indicative of the operating results to be expected for the full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from these Unaudited Condensed Consolidated Financial Statements. These Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2022. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of income and expenses during the reported periods. Finance Receivables Measured at Fair Value Effective January 1, 2018, we adopted the fair value method of accounting for finance receivables acquired on or after that date. For each finance receivable acquired after 2017, we consider the price paid on the purchase date as the fair value for such receivable. We estimate the cash to be received in the future with respect to such receivables, based on our experience with similar receivables acquired in the past. We then compute the internal rate of return that results in the present value of those estimated cash receipts being equal to the purchase date fair value. Thereafter, we recognize interest income on such receivables on a level yield basis using that internal rate of return as the applicable interest rate. Cash received with respect to such receivables is applied first against such interest income, and then to reduce the recorded value of the receivables. We re-evaluate the fair value of such receivables at the close of each measurement period. If the reevaluation were to yield a value materially different from the recorded value, an adjustment would be required. Results for the first quarter include no mark down reversal to the carrying value of the portion of the receivables portfolio accounted for at fair value. Mark downs are reflected as a reduction in revenue. 8 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Anticipated credit losses are included in our estimation of cash to be received with respect to receivables. Because such credit losses are included in our computation of the appropriate level yield, we do not thereafter make periodic provision for credit losses, as our best estimate of the lifetime aggregate of credit losses is included in that initial computation. Also, because we include anticipated credit losses in our computation of the level yield, the computed level yield is materially lower than the average contractual rate applicable to the receivables. Because our initial recorded value is fixed as the price we pay for the receivable, rather than as the contractual principal balance, we do not record acquisition fees as an amortizing asset related to the receivables, nor do we capitalize costs of acquiring the receivables. Rather we recognize the costs of acquisition as expenses in the period incurred. Other Income The following table presents the primary components of Other Income for the three-month periods ending March 31, 2023 and 2022: Schedule of other income Three Months Ended March 31, 2023 2022 (In thousands) Origination and servicing fees from third party receivables $ 2,738 $ 844 Direct mail revenues – 774 Sales tax refunds 260 144 Other 40 144 Other income for the period $ 3,038 $ 1,906 Leases The Company has operating leases for corporate offices, equipment, software and hardware. The Company has entered into operating leases for the majority of its real estate locations, primarily office space. These leases are generally for periods of three to seven years with various renewal options. The depreciable life of leased assets is limited by the expected lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet and the related lease expense is recognized on a straight-line basis over the lease term. 9 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following table presents the supplemental balance sheet information related to leases: Supplemental balance sheet information related to leases March 31, December 31, 2023 2022 (In thousands) Operating Leases Operating lease right-of-use assets $ 28,397 $ 28,397 Less: Accumulated amortization right-of-use assets ( 23,611 ) ( 22,613 ) Operating lease right-of-use assets, net $ 4,786 $ 5,784 Operating lease liabilities $ ( 5,154 ) $ ( 6,234 ) Finance Leases Property and equipment, at cost $ 3,454 $ 3,407 Less: Accumulated depreciation ( 3,335 ) ( 3,301 ) Property and equipment, net $ 119 $ 106 Finance lease liabilities $ ( 125 ) $ ( 177 ) Weighted Average Discount Rate Operating lease 5.0 % 5.0 % Finance lease 6.5 % 6.5 % Schedule of maturities of lease liabilities Maturities of lease liabilities were as follows: (In thousands) Operating Finance Year Ending March 31, Lease Lease 2023 $ 2,864 $ 55 2024 1,493 37 2025 747 20 2026 455 11 2027 452 11 Thereafter 565 1 Total undiscounted lease payments 6,576 135 Less amounts representing interest ( 1,422 ) ( 260 ) Lease Liability $ 5,154 $ ( 125 ) The following table presents the lease expense included in General and administrative and Occupancy expense on our Unaudited Condensed Consolidated Statement of Operations: Lease information Three Months Ended March 31, 2023 2022 (In thousands) Operating lease cost $ 1,360 $ 1,761 Finance lease cost 101 298 Total lease cost $ 1,461 $ 2,059 10 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following table presents the supplemental cash flow information related to leases: Supplemental cash flow information related to leases Three Months Ended March 31, 2023 2022 (In thousands) Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 1,360 $ 1,788 Operating cash flows from finance leases 99 282 Financing cash flows from finance leases 2 16 Stock-based Compensation We recognize compensation costs in the financial statements for all share-based payments based on the grant date fair value estimated in accordance with the provisions of ASC 718 “Stock Compensation”. For the three months ended March 31, 2023 and 2022, we recorded stock-based compensation costs in the amount of $ 912,000 and $ 790,000 , respectively. As of March 31, 2023, unrecognized stock-based compensation costs to be recognized over future periods equaled $ 8.6 million . This amount will be recognized as expense over a weighted-average period of 2.2 years. The following represents stock option activity for the three months ended March 31, 2023: 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 11,167 $ 5.21 N/A Granted – – N/A Exercised ( 1,086 ) 6.41 N/A Forfeited – – N/A Options outstanding at the end of period 10,081 $ 5.08 3.22 years Options exercisable at the end of period 6,871 $ 4.43 2.29 years The following table presents the price distribution of stock options outstanding and exercisable for the years ended March 31, 2023 and December 31, 2022: Schedule of stock options outstanding and exercisable Number of shares as of Number of shares as of March 31, 2023 December 31, 2022 Outstanding Exercisable Outstanding Exercisable (In thousands) (In thousands) Range of exercise prices: $2.00 - $2.99 1,440 770 1,445 775 $3.00 - $3.99 3,646 3,356 3,785 3,495 $4.00 - $4.99 2,677 1,740 2,739 1,802 $5.00 - $5.99 – – – – $6.00 - $6.99 – – 740 740 $7.00 - $7.99 608 608 748 748 $10.00 - $10.99 1,710 397 1,710 210 Total shares 10,081 6,871 11,167 7,770 11 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS At March 31, 2023 the aggregate intrinsic value of options outstanding and exercisable was $ 56.5 million and $ 43.0 million , respectively. There were 1,086,000 options exercised for the three months ended March 31, 2023 compared to 1,366,000 for the comparable period in 2022. The total intrinsic value of options exercised was $ 3.8 million and $ 10.2 for the three-month periods ended March 31, 2023 and 2022. There were 2,661,000 shares available for future stock option grants under existing plans as of March 31, 2023. Purchases of Company Stock The table below describes the purchase of our common stock for the three months ended March 31, 2023 and 2022: Schedule of purchases of company stock Three Months Ended March 31, 2023 March 31, 2022 Shares Avg. Price Shares Avg. Price Open market purchases 263,185 $ 10.42 922,363 $ 11.19 Shares redeemed upon net exercise of stock options 458,392 9.93 295,088 12.68 Total stock purchases 721,577 $ 10.11 1,217,451 $ 11.55 Reclassifications Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on net income or shareholders’ equity. Financial Covenants Certain of our securitization transactions, our warehouse credit facilities and our residual interest financing contain various financial covenants requiring minimum financial ratios and results. Such covenants include maintaining minimum levels of liquidity and net worth and not exceeding maximum leverage levels. As of March 31, 2023, we were in compliance with all such covenants. In addition, certain of our debt agreements other than our term securitizations contain cross-default provisions. Such cross-default provisions would allow the respective creditors to declare a default if an event of default occurred with respect to other indebtedness of ours, but only if such other event of default were to be accompanied by acceleration of such other indebtedness. Provision for Contingent Liabilities We are routinely involved in various legal proceedings resulting from our consumer finance activities and practices, both continuing and discontinued. Our legal counsel has advised us on such matters where, based on information available at the time of this report, there is an indication that it is both probable that a liability has been incurred and the amount of the loss can be reasonably determined. Adoption of New Accounting Standards In March 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2022-02, known as the Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures. ASU 2022-02 eliminates the accounting guidance for TDRs in ASC 310-40 on troubled debt restructurings for entities that have adopted the CECL model introduced by ASU 2016-13, Current Expected Credit Loss. ASU 2022-02 also requires that public business entities disclose current-period gross charge offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments – Credit Losses – Measured at Amortized Cost. This guidance is effective for fiscal years beginning after December 15, 2022, and the adoption of this guidance did not have a material impact on the condensed consolidated financial statements. 12 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (2) Finance Receivables Our portfolio of finance receivables consists of small-balance homogeneous contracts comprising a single segment and class that is collectively evaluated for impairment on a portfolio basis according to delinquency status. Our contract purchase guidelines are designed to produce a homogenous portfolio. For key terms such as interest rate, length of contract, monthly payment and amount financed, there is relatively little variation from the average for the portfolio. We report delinquency on a contractual basis. Once a contract becomes greater than 90 days delinquent, we do not recognize additional interest income until the obligor under the contract makes sufficient payments to be less than 90 days delinquent. Any payments received on a contract that is greater than 90 days delinquent are first applied to accrued interest and then to principal reduction. In January 2018 the Company adopted the fair value method of accounting for finance receivables acquired after 2017. Finance receivables measured at fair value are recorded separately on the Company’s Balance Sheet and are excluded from all tables in this footnote. We consider an automobile contract delinquent when an obligor fails to make at least 90% of a contractually due payment by the following due date, which date may have been extended within limits specified in the servicing agreements. The period of delinquency is based on the number of days payments are contractually past due, as extended where applicable. Automobile contracts less than 31 days delinquent are not included. In certain circumstances we will grant obligors one-month payment extensions to assist them with temporary cash flow problems. The only modification of terms is to advance the obligor’s next due date by one month and extend the maturity date of the receivable by one month. In certain limited cases, a two-month extension may be granted. There are no other concessions such as a reduction in interest rate, forgiveness of principal or of accrued interest. Accordingly, we consider such extensions to be insignificant delays in payments rather than troubled debt restructurings. Automobile finance receivables, net of unearned interest was $ 69.5 million and $ 92.3 million as of March 31, 2023 and December 31, 2022, respectively. The following table summarizes the delinquency status of finance receivables as of March 31, 2023 and December 31, 2022: Schedule of delinquency status of finance receivables March 31, December 31, 2023 2022 (In thousands) Deliquency Status Current $ 52,630 $ 65,764 31 - 60 days 10,950 16,796 61 - 90 days 4,769 7,756 91 + days 1,184 1,988 $ 69,533 $ 92,304 Finance receivables totaling $ 1.2 million and $ 2.0 million at March 31, 2023 and December 31, 2022, respectively, including all receivables greater than 90 days delinquent, have been placed on non-accrual status as a result of their delinquency status. Allowance for Credit Losses – Finance Receivables The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of finance receivables to present the net amount expected to be collected. Charge offs are deducted from the allowance when management believes that collectability is unlikely. Management estimates the allowance using relevant available information, from internal and external sources, relating to past events, current conditions and, reasonable and supportable forecasts. We believe our historical credit loss experience provides the best basis for the estimation of expected credit losses. Consequently, we use historical loss experience for older receivables, aggregated into vintage pools based on their calendar quarter of origination, to forecast expected losses for less seasoned quarterly vintage pools. We measure the weighted average monthly incremental change in cumulative net losses for the vintage pools in the relevant historical period. For the pools in the relevant historical period, we consider each pool’s performance from its inception through the end of the current period. We then apply the results of the historical analysis to less seasoned vintage pools beginning with each vintage pool’s most recent actual cumulative net loss experience and extrapolating from that point based on the historical data. We believe the pattern and magnitude of losses on older vintages allows us to establish a reasonable and supportable forecast of less seasoned vintages. 13 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Our contract purchase guidelines are designed to produce a homogenous portfolio. For key credit characteristics of individual contracts such as obligor credit history, job stability, residence stability and ability to pay, there is relatively little variation from the average for the portfolio. Similarly, for key structural characteristics such as loan-to-value, length of contract, monthly payment and amount financed, there is relatively little variation from the average for the portfolio. Consequently, we do not believe there are significant differences in risk characteristics between various segments of our portfolio. Our methodology incorporates historical pools that are sufficiently seasoned to capture the magnitude and trends of losses within those vintage pools. Furthermore, the historical period encompasses a substantial volume of receivables over periods that include fluctuations in the competitive landscape, the Company’s rates of growth, size of our managed portfolio and fluctuations in economic growth and unemployment. In consideration of the depth and breadth of the historical period, and the homogeneity of our portfolio, we generally do not adjust historical loss information for differences in risk characteristics such as credit or structural composition of segments of the portfolio or for changes in environmental conditions such as changes in unemployment rates, collateral values or other factors. However, we have considered how certain qualitative factors may affect future credit losses and have incorporated our judgement of the effect of such factors into our estimates. The following table presents the amortized cost basis of our finance receivables by annual vintage as of March 31, 2023 and December 31, 2022. Schedule of amortized cost basis of finance receivables March 31, December 31, 2023 2022 (In thousands) Annual Vintage Pool 2014 and prior $ 1,272 $ 1,865 2015 5,853 8,627 2016 21,084 28,632 2017 41,324 53,180 $ 69,533 $ 92,304 The following table presents a summary of the activity for the allowance for finance credit losses for the three-month periods ended March 31, 2023 and 2022: Schedule of allowance for finance credit losses Three Months Ended March 31, 2023 2022 (In thousands) Balance at beginning of period $ 21,753 $ 56,206 Provision for credit losses on finance receivables ( 9,000 ) ( 9,400 ) Charge-offs ( 3,018 ) ( 5,359 ) Recoveries 4,993 3,554 Balance at end of period $ 14,728 $ 45,001 14 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following table presents the gross charge-offs by year of origination of our finance receivables for the three-month periods ended March 31, 2023 and 2022: Schedule of charge-offs for financed receivables Three Months Ended March 31, 2023 2022 Annual Vintage Pool (In thousands) 2014 and prior $ 141 $ 292 2015 444 1,089 2016 1,321 2,025 2017 1,502 2,172 Applied against repos in inventory (net) ( 390 ) ( 219 ) $ 3,018 $ 5,359 Excluded from finance receivables are contracts that were previously classified as finance receivables but were reclassified as other assets because we have repossessed the vehicle securing the Contract. The following table presents a summary of such repossessed inventory together with the allowance for losses in repossessed inventory that is not included in the allowance for finance credit losses: Schedule of allowance for losses on repossessed inventory March 31, December 31, 2023 2022 (In thousands) Gross balance of repossessions in inventory $ 1,403 $ 1,894 Allowance for losses on repossessed inventory ( 933 ) ( 1,323 ) Net repossessed inventory included in other assets $ 470 $ 571 (3) Securitization Trust Debt We have completed many securitization transactions that are structured as secured borrowings for financial accounting purposes. The debt issued in these transactions is shown on our Unaudited Condensed Consolidated Balance Sheets as “Securitization trust debt,” and the components of such debt are summarized in the following table: Schedule of Long-term Debt Instruments Weighted Average Final Receivables Outstanding Outstanding Contractual Debt Interest Scheduled Pledged at Principal at Principal at Rate at Payment March 31, Initial March 31, December 31, March 31, Series Date (1) 2023 (2) Principal 2023 2022 2023 (Dollars in thousands) CPS 2018-A March 2025 $ – $ 190,000 $ – $ 12,939 – CPS 2018-B December 2024 – 201,823 – 17,077 – CPS 2018-C September 2025 20,407 230,275 15,873 20,222 6.07 % CPS 2018-D June 2025 24,958 233,730 20,639 25,563 5.82 % CPS 2019-A March 2026 31,633 254,400 27,107 32,898 5.73 % CPS 2019-B June 2026 33,965 228,275 29,262 33,897 5.56 % CPS 2019-C September 2026 40,054 243,513 35,650 41,515 4.55 % CPS 2019-D December 2026 52,643 274,313 46,672 53,625 3.86 % CPS 2020-A March 2027 48,654 260,000 44,845 52,705 4.18 % CPS 2020-B June 2027 55,858 202,343 36,595 41,736 6.36 % CPS 2020-C November 2027 75,563 252,200 64,089 72,894 3.45 % CPS 2021-A March 2028 80,223 230,545 61,051 72,076 1.49 % CPS 2021-B June 2028 101,063 240,000 88,714 101,206 2.01 % CPS 2021-C September 2028 147,527 291,000 130,671 147,593 1.70 % CPS 2021-D December 2028 200,339 349,202 186,363 209,277 2.00 % CPS 2022-A April 2029 220,157 316,800 201,403 222,613 2.29 % CPS 2022-B October 2029 325,908 395,600 298,734 325,907 4.28 % CPS 2022-C April 2030 364,484 391,600 318,725 346,714 5.34 % CPS 2022-D August 2030 302,057 307,018 274,951 292,461 7.45 % CPS 2023-A November 2030 220,157 324,768 308,120 – 6.13 % $ 2,345,648 $ 5,417,405 $ 2,189,463 $ 2,122,919 _________________ (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 $ 644.0 million in 2023, $ 659.5 million in 2024, $ 398.9 million in 2025, $ 239.7 million in 2026, $ 151.8 million in 2027, $ 76.0 million in 2028, and $ 5.2 million in 2029. (2) Includes repossessed assets that are included in Other assets on our Unaudited Condensed Consolidated Balance Sheet. 15 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Debt issuance costs of $ 14.4 million and $ 14.2 million as of March 31, 2023 and December 31, 2022, respectively, have been excluded from the table above. These debt issuance costs are presented as a direct deduction to the carrying amount of the Securitization trust debt on our Consolidated Balance Sheets. All of the securitization trust debt was sold in private placement transactions to qualified institutional buyers. The debt was issued through our wholly-owned bankruptcy remote subsidiaries and is secured by the assets of such subsidiaries, but not by our other assets. The terms of the securitization agreements related to the issuance of the securitization trust debt and the warehouse credit facilities require that we meet certain delinquency and credit loss criteria with respect to the pool of receivables, and certain of the agreements require that we maintain minimum levels of liquidity and not exceed maximum leverage levels. As of March 31, 2023, we were in compliance with all such covenants. We are responsible for the administration and collection of the automobile contracts. The securitization agreements also require certain funds be held in restricted cash accounts to provide additional collateral for the borrowings, to be applied to make payments on the securitization trust debt or as pre-funding proceeds from a term securitization prior to the purchase of additional collateral. As of March 31, 2023, restricted cash under the various agreements totaled approximately $ 158.9 million . Interest expense on the securitization trust debt consists of the stated rate of interest plus amortization of additional costs of borrowing. Additional costs of borrowing include facility fees, amortization of deferred financing costs and discounts on notes sold. Deferred financing costs and discounts on notes sold related to the securitization trust debt are amortized using a level yield method. Accordingly, the effective cost of the securitization trust debt is greater than the contractual rate of interest disclosed above. Our wholly-owned bankruptcy remote subsidiaries were formed to facilitate the above asset-backed financing transactions. Similar bankruptcy remote subsidiaries issue the debt outstanding under our credit facilities. Bankruptcy remote refers to a legal structure in which it is expected that the applicable entity would not be included in any bankruptcy filing by its parent or affiliates. All of the assets of these subsidiaries have been pledged as collateral for the related debt. All such transactions, treated as secured financings for accounting and tax purposes, are treated as sales for all other purposes, including legal and bankruptcy purposes. None of the assets of these subsidiaries are available to pay other creditors. (4) Debt The terms and amounts of our other debt outstanding at March 31, 2023 and December 31, 2022 are summarized below: Schedule of debt outstanding Amount Outstanding at March 31, December 31, 2023 2022 (In thousands) Description Interest Rate Maturity Warehouse lines of credit 3.00% over one month Libor (Minimum 3.75%) 7.99% and 7.48% at March 31, 2023 and December 31, 2022, respectively July 2024 168,781 150,293 4.15% over a commercial paper rate (Minimum 5.15%) 9.09% and 8.60% at March 31, 2023, and December 31, 2022, respectively January 2024 119,089 137,585 Residual interest financing 7.86 % June 2026 50,000 50,000 Subordinated renewable notes Weighted average rate of 7.95% and 7.82% at March 31, 2023 and December 31, 2022, respectively Weighted average maturity of December 2024 and October 2024 at March 31, 2023 and December 31, 2022, respectively 23,443 25,263 $ 361,313 $ 363,141 16 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS On February 2, 2022, we renewed our two-year revolving credit agreement with Ares Agent Services, L.P. There was $ 119.1 million outstanding under this facility at March 31, 2023. On June 28, 2022, we increased the capacity of its credit agreement with Ares Agent Services, L.P. from $ 100 million to $ 200 million . The revolving period for this facility was extended to January 2024 followed by an amortization period through January 2028 for any receivables pledged at the end of the revolving period. On July 15, 2022, we renewed our two-year revolving credit agreement with Citibank, N.A., and doubled the capacity from $ 100 million to $ 200 million . There was $ 168.8 million outstanding under this facility at March 31, 2023. The revolving period for this facility was extended to July 2024 followed by an amortization period through July 2025 for any receivables pledged at the end of the revolving period. Unamortized debt issuance costs of $ 314,000 and $ 377,000 as of March 31, 2023 and December 31, 2022, respectively, have been excluded from the amount reported above for residual interest financing. Similarly, unamortized debt issuance costs of $ 2.1 million and $ 2.6 million as of March 31, 2023 and December 31, 2022, respectively, have been excluded from the Warehouse lines of credit amounts in the table above. These debt issuance costs are presented as a direct deduction to the carrying amount of the debt on our Unaudited Condensed Consolidated Balance Sheets. (5) Interest Income and Interest Expense The following table presents the components of interest income: Schedule of interest income Three Months Ended March 31, 2023 2022 (In thousands) Interest on finance receivables $ 4,662 $ 11,314 Interest on finance receivables at fair value 74,058 58,740 Other interest income 1,342 6 Interest income $ 80,062 $ 70,060 The following table presents the components of interest expense: Schedule of interest expense Three Months Ended March 31, 2023 2022 (In thousands) Securitization trust debt $ 26,353 $ 13,528 Warehouse lines of credit 4,848 1,158 Residual interest financing 1,050 1,094 Subordinated renewable notes 508 620 Interest expense $ 32,759 $ 16,400 (6) Earnings Per Share Earnings per share for the three-month periods ended March 31, 2023 and 2022 were calculated using the weighted average number of shares outstanding for the related period. The following table reconciles the number of shares used in the computations of basic and diluted earnings per share for the three-month periods ended March 31, 2023 and 2022: 17 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Computation of earnings per share Three Months Ended March 31, 2023 2022 (In thousands) Weighted average number of common shares outstanding during the period used to compute basic earnings per share 20,418 21,221 Incremental common shares attributable to exercise of outstanding options and warrants 4,974 6,976 Weighted average number of common shares used to compute diluted earnings per share 25,392 28,197 If the anti-dilutive effects of common stock equivalents were considered, shares included in the diluted earnings per share calculation for the three-months ended March 31, 2023 and 2022 would have included an additional 1.7 million and 558,000 shares, respectively, attributable to the exercise of outstanding options and warrants. (7) Income Taxes We file numerous consolidated and separate income tax returns with the United States and with many states. With few exceptions, we are no longer subject to U.S. federal, state, or local examinations by tax authorities for years before 2015. As of March 31,2023, and December 31, 2022, we had no unrecognized tax benefits for uncertain tax positions. We do not anticipate that total unrecognized tax benefits will significantly change due to any settlements of audits or expirations of statutes of limitations over the next 12 months. The Company and its subsidiaries file a consolidated federal income tax return and combined or stand-alone state franchise tax returns for certain states. We utilize the asset and liability method of accounting for income taxes, under which deferred income taxes are recognized for the future tax consequences attributable to the differences between the financial statement values of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are recognized subject to management’s judgment that realization is more likely than not. A valuation allowance is recognized for a deferred tax asset if, based on the weight of the available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. In making such judgments, significant weight is given to evidence that can be objectively verified. Although realization is not assured, we believe that the realization of the recognized net deferred tax asset of $ 9.8 million as of March 31, 2023 is more likely than not based on forecasted future net earnings. Our net deferred tax asset of $9.8 million consists of approximately $ 6.7 million of net U.S. federal deferred tax assets and $ 3.1 million of net state deferred tax assets. Income tax expense was $ 4.6 million for the three months ended March 31, 2023, representing effective income tax rates of 25 %. For the prior year period, income tax expense was $ 8.2 million for the three months ended March 31, 2022 representing an effective tax rate of 28 %. (8) Legal Proceedings Consumer Litigation. We are routinely involved in various legal proceedings resulting from our consumer finance activities and practices, both continuing and discontinued. Consumers can and do initiate lawsuits against us alleging violations of law applicable to collection of receivables, and such lawsuits sometimes allege that resolution as a class action is appropriate. For the most part, we have legal and factual defenses to consumer claims, which we routinely contest or settle (for immaterial amounts) depending on the particular circumstances of each case. 18 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Following our filing of a complaint for a deficiency judgment in the Superior Court at Waterbury, Connecticut, the defendant filed a cross-claim alleging that our deficiency notices were not compliant with Connecticut law, and seeking relief on behalf of a class of Connecticut obligors whose vehicles we had repossessed. The defendant’s contract provided for resolution of disputes exclusively by arbitration, and exclusively on an individual basis, not a class basis. Nevertheless, in August 2021, the court denied our motion to compel arbitration, without opinion. In April 2022, a motion for certification of a class was filed but has not been ruled upon. It is reasonable to expect that resolution of these claims will be on a class basis. Wage and Hour Claim. On September 24, 2018, a former employee filed a lawsuit against us in the Superior Court of Orange County, California, alleging that we incorrectly classified our sales representatives as outside salespersons exempt from overtime wages, mandatory break periods and certain other employee protective provisions of California and federal law. The complaint seeks injunctive relief, an award of unpaid wages, liquidated damages, and attorney fees and interest. The plaintiff purports to act on behalf of a class of similarly situated employees and ex-employees. As of the date of this report, no motion for class certification has been filed or granted. We believe that our compensation practices with respect to our sales representatives are compliant with applicable law. Accordingly, we have defended and intend to continue to defend this lawsuit. Massachusetts Civil Investigative Demand . In September 2021, we received a civil investigative demand from the Office of the Attorney General of the Commonwealth of Massachusetts relating to the Company’s communications with and repossession notices sent to Massachusetts customers. We are cooperating with the inquiry. 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 March 31, 2023, 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 March 31, 2023 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 March 31, 2023 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. (9) Fair Value Measurements ASC 820, "Fair Value Measurements" clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The three levels are defined as follows: level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets; level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement. Effective January 2018 we have elected to use the fair value method to value our portfolio of finance receivables acquired in January 2018 and thereafter. Our valuation policies and procedures have been developed by our Accounting department in conjunction with our Risk department and with consultation with outside valuation experts. Our policies and procedures have been approved by our Chief Executive and our Board of Directors and include methodologies for valuation, internal reporting, calibration and back testing. Our periodic review of valuations includes an analysis of changes in fair value measurements and documentation of the reasons for such changes. There is little available third-party information such as broker quotes or pricing services available to assist us in our valuation process. 19 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Our level 3, unobservable inputs reflect our own assumptions about the factors that market participants use in pricing similar receivables and are based on the best information available in the circumstances. They include such inputs as estimates for the magnitude and timing of net charge-offs and the rate of amortization of the portfolio of finance receivable. Significant changes in any of those inputs in isolation would have a significant effect on our fair value measurement. For the quarter ended March 31, 2023, the Company evaluated the appropriate fair value and future earnings rate of existing receivables compared to recently acquired receivables and our assessment of potential additional future net losses on the portfolio of finance receivables carried at fair value and did not record a mark down to that portfolio. The table below presents a reconciliation of the finance receivables measured at fair value on a recurring basis using significant unobservable inputs: Schedule of reconciliation of the finance receivables measured at fair value on a recurring basis Three Months Ended March 31, 2023 2022 (In thousands) Balance at beginning of period $ 2,476,617 $ 1,749,098 Finance receivables at fair value acquired during period 352,598 393,407 Payments received on finance receivables at fair value ( 206,626 ) ( 209,844 ) Net interest income accretion on fair value receivables ( 47,472 ) ( 31,204 ) Mark to fair value – 2,400 Balance at end of period $ 2,575,117 $ 1,903,857 The table below compares the fair values of these finance receivables to their contractual balances for the periods shown: Finance receivables fair and contractual balances March 31, 2023 December 31, 2022 Contractual Fair Contractual Fair Balance Value Balance Value (In thousands) Finance receivables measured at fair value $ 2,810,908 $ 2,575,117 $ 2,701,184 $ 2,476,617 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 March 31, December 31, Unobservable March 31, December 31, 2023 2022 Inputs 2023 2022 (In thousands) Assets: Finance receivables measured at fair value $ 2,575,117 $ 2,476,617 Discount rate 11.0% - 11.5% 11.0% - 11.3% Cumulative net losses 10.0% - 20.5% 13.4% - 19.4% 20 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the delinquency status of these finance receivables measured at fair value as of March 31, 2023 and December 31, 2022: Schedule of delinquency status of finance receivables measured at fair value March 31, December 31, 2023 2022 (In thousands) Delinquency Status Current $ 2,543,344 $ 2,375,271 31 - 60 days 140,793 184,968 61 - 90 days 57,808 72,390 91 + days 22,656 29,048 Repo 46,307 39,507 $ 2,810,908 $ 2,701,184 Repossessed vehicle inventory, which is included in Other assets on our unaudited condensed consolidated balance sheet, is measured at fair value using level 2 assumptions based on our actual loss experience on sale of repossessed vehicles. At March 31, 2023 the finance receivables related to the repossessed vehicles in inventory totaled $1.4 million. We have applied a valuation adjustment, or loss allowance, of $933,000, which is based on a recovery rate of approximately 34%, resulting in an estimated fair value and carrying amount of $470,000. The fair value and carrying amount of the repossessed inventory at December 31, 2022 was $1.9 million after applying a valuation adjustment of $1.3 million. There were no transfers in or out of level 1, level 2 or level 3 assets and liabilities for the three months ended March 31, 2023 and 2022. The estimated fair values of financial assets and liabilities at March 31, 2023 and December 31, 2022, were as follows: Schedule of estimated fair values of financial assets and liabilities As of March 31, 2023 Financial Instrument (In thousands) Carrying Fair Value Measurements Using: Value Level 1 Level 2 Level 3 Total Assets: Cash and cash equivalents $ 10,188 $ 10,188 $ – $ – $ 10,188 Restricted cash and equivalents 158,895 158,895 – – 158,895 Finance receivables, net 54,805 – – 49,104 49,104 Accrued interest receivable 86 – – 86 86 Liabilities: Warehouse lines of credit $ 285,809 $ – $ – $ 285,809 $ 285,809 Residual interest financing 49,686 49,686 49,686 Accrued interest payable 6,888 – – 6,888 6,888 Securitization trust debt 2,175,068 – – 2,098,717 2,098,717 Subordinated renewable notes 23,443 – – 23,443 23,443 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 21 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (10) Subsequent Events On April 27, 2023 we executed our second securitization of 2023. In the transaction, qualified institutional buyers purchased $332.9 million of asset-backed notes secured by $369.9 million in automobile receivables originated by CPS. The sold notes, issued by CPS Auto Receivables Trust 2023-B, consist of five classes. Ratings of the notes were provided by Moody’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 7.17%. The 2023-B transaction has initial credit enhancement consisting of a cash deposit equal to 1.00% of the original receivable pool balance and overcollateralization of 10.00%. The transaction agreements require accelerated payment of principal on the notes to reach overcollateralization of the lesser of 11.50% of the original receivable pool balance, or 25.00% 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. 22 Item 2 . Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview We are a specialty finance company. Our business is to purchase and service retail automobile contracts originated primarily by franchised automobile dealers and, to a lesser extent, by select independent dealers in the United States in the sale of new and used automobiles, light trucks and passenger vans. Through our automobile contract purchases, we provide indirect financing to the customers of dealers who have limited credit histories or past credit problems, who we refer to as sub-prime customers. We serve as an alternative source of financing for dealers, facilitating sales to customers who otherwise might not be able to obtain financing from traditional sources, such as commercial banks, credit unions and the captive finance companies affiliated with major automobile manufacturers. In addition to purchasing installment purchase contracts directly from dealers, we also originate vehicle purchase money loans by lending directly to consumers and have (i) acquired installment purchase contracts in four merger and acquisition transactions, and (ii) purchased immaterial amounts of vehicle purchase money loans from non-affiliated lenders. In this report, we refer to all of such contracts and loans as "automobile contracts." We were incorporated and began our operations in March 1991. From inception through March 31, 2023, we have originated a total of approximately $20.4 billion of automobile contracts, primarily by purchasing retail installment sales contracts from dealers, and to a lesser degree, by originating loans secured by automobiles directly with consumers. In addition, we acquired a total of approximately $822.3 million of automobile contracts in mergers and acquisitions in 2002, 2003, 2004 and 2011. Recent contract purchase volumes and managed portfolio levels are shown in the table below: $ in thousands Period Contracts Purchased in Period Managed Portfolio at Period End 2017 859,069 2,333,530 2018 902,416 2,380,847 2019 1,002,782 2,416,042 2020 742,584 2,174,972 2021 1,146,321 2,249,069 2022 1,845,385 3,001,308 Three months ended March 31, 2023 415,151 3,130,891 In May 2021 we began purchasing some contracts for immediate sale to a third-party to whom we refer applications that don’t meet our lending criteria. We service all such contracts on behalf of the third-party. We earn fees for originating the receivable and also servicing fees on active accounts in the third-party portfolio. For the three months ended March 31, 2023, we originated $60.0 million under this third-party program. As of March 31, 2023, our managed portfolio includes $249.0 million of such third-party receivables. Our principal executive offices are in Las Vegas, Nevada. Most of our operational and administrative functions take place in Irvine, California. Credit and underwriting functions are performed primarily in that California branch with certain of these functions also performed in our Florida and Nevada branches. We service our automobile contracts from our California, Nevada, Virginia, Florida and Illinois branches. The programs we offer to dealers and consumers are intended to serve a wide range of sub-prime customers, primarily through franchised new car dealers. We originate automobile contracts with the intention of financing them on a long-term basis through securitizations. Securitizations are transactions in which we sell a specified pool of contracts to a special purpose subsidiary of ours, which in turn issues asset-backed securities to fund the purchase of the pool of contracts from us. 23 Securitization and Warehouse Credit Facilities Throughout the period for which information is presented in this report, we have purchased automobile contracts with the intention of financing them on a long-term basis through securitizations, and on an interim basis through warehouse credit facilities. All such financings have involved identification of specific automobile contracts, sale of those automobile contracts (and associated rights) to one of our special-purpose subsidiaries, and issuance of asset-backed securities to be purchased by institutional investors. Depending on the structure, these transactions may be accounted for under generally accepted accounting principles as sales of the automobile contracts or as secured financings. All of our active securitizations are structured as secured financings. When structured to be treated as a secured financing for accounting purposes, the subsidiary is consolidated with us. Accordingly, the sold automobile contracts and the related debt appear as assets and liabilities, respectively, on our consolidated balance sheet. We then periodically (i) recognize interest and fee income on the contracts, and (ii) recognize interest expense on the securities issued in the transaction. For automobile contracts acquired after 2017 we take account of estimated credit losses in our computation of a level yield used to determine recognition of interest on the contracts. For contracts acquired before 2018, we adopted CECL on January 1, 2020 and we may, as circumstances warrant, record as expense provisions for credit losses. Since 1994 we have conducted 96 term securitizations of automobile contracts that we originated. As of March 31, 2023, 18 of those securitizations are active and all are structured as secured financings. We have generally conducted our securitizations on a quarterly basis, near the end of each calendar quarter, resulting in four securitizations per calendar year. However, in 2020, we closed only three term securitization transactions in that calendar year rather than four. Our recent history of term securitizations is summarized in the table below: Recent Asset-Backed Term Securitizations $ in thousands Period Number of Term Securitizations Receivables Pledged in Term Securitizations 2017 4 $ 870,000 2018 4 883,452 2019 4 1,014,124 2020 3 741,867 2021 4 1,145,002 2022 4 1,537,383 Three months ended March 31, 2023 1 362,870 Generally, prior to a securitization transaction we fund our automobile contract purchases primarily with proceeds from warehouse credit facilities. We currently have short-term funding capacity of $400 million over two credit facilities. The first credit facility was established in May 2012. This facility was most recently renewed in July 2022, extending the revolving period to July 2024, with an optional amortization period through July 2025. In addition, the capacity was doubled from $100 million to $200 million at the July 2022 renewal. In November 2015, we entered into another $100 million facility. This facility was most recently renewed in January 2022, extending the revolving period to January 2024, followed by an amortization period to January 2026. In June 2022, we doubled the capacity for this facility from $100 million to $200 million. In a securitization and in our warehouse credit facilities, we are required to make certain representations and warranties, which are generally similar to the representations and warranties made by dealers in connection with our purchase of the automobile contracts. If we breach any of our representations or warranties, we will be obligated to repurchase the automobile contract at a price equal to the principal balance plus accrued and unpaid interest. We may then be entitled under the terms of our dealer agreement to require the selling dealer to repurchase the contract at a price equal to our purchase price, less any principal payments made by the customer. Subject to any recourse against dealers, we will bear the risk of loss on repossession and resale of vehicles under automobile contracts that we repurchase. 24 In a securitization, the related special purpose subsidiary may be unable to release excess cash to us if the credit performance of the securitized automobile contracts falls short of pre-determined standards. Such releases represent a material portion of the cash that we use to fund our operations. An unexpected deterioration in the performance of securitized automobile contracts could therefore have a material adverse effect on both our liquidity and results of operations. Receivables we originate and service for third-parties are not pledged to our warehouse facilities or included in our securitizations. Financial Covenants Certain of our securitization transactions 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 of our debt agreements other than our term securitizations contain cross-default provisions. Such cross-default provisions would allow the respective creditors to declare a default if an event of default occurred with respect to other indebtedness of ours, but only if such other event of default were to be accompanied by acceleration of such other indebtedness. As of March 31, 2023, we were in compliance with all such covenants. Results of Operations Comparison of Operating Results for the three months ended March 31, 2023 with the three months ended March 31, 2022 Revenues . During the three months ended March 31, 2023, our revenues were $83.1 million, an increase of $8.7 million, or 11.7%, from the prior year revenue of $74.4 million. The primary reason for the increase in revenues is the increase in interest income resulting from the increase in the average outstanding balance of finance receivables measured at fair value. Revenues for the three months ended March 31, 2022 include a $2.4 million mark up to the recorded value of the finance receivables measured at fair value. The marks are estimates based on our evaluation of the appropriate fair value and future earnings rate of existing receivables compared to recently acquired receivables and increases or decreases in our estimates of future net losses. Based on this evaluation, there was no mark up or mark down to the fair value portfolio in the current year period. During the three months ended March 30, 2022, we reduced our estimate for expected future losses in finance receivables measured at fair value as we have observed that our previous estimates for increased losses due to the pandemic had not materialized. The change in estimated losses resulted in the $2.4 million mark up for the prior year period. Interest income for the three months ended March 31, 2023 increased $10.0 million, or 14.3%, to $80.1 million from $70.1 million in the prior year. The primary reason for the increase in interest income is the 34.4% increase in the average balance of finance receivables measured at fair value over the prior year period. The table below shows the average balances and interest yields of the two components of our loan portfolio for the three months ended March 31, 2023 and 2022: Three Months Ended March 31, 2023 2022 (Dollars in thousands) Average Interest Average Interest Balance Interest Yield Balance Interest Yield Interest Earning Assets Finance receivables $ 78,729 $ 6,004 30.5% $ 206,197 $ 11,320 22.0% Finance receivables measured at fair value 2,777,869 74,058 10.7% 2,067,286 58,740 11.4% Total $ 2,856,598 $ 80,062 11.2% $ 2,273,483 $ 70,060 12.3% Other income was $3.0 million for the three months ended March 31, 2023 compared to $1.9 million for the comparable period in 2022. This 59.4% increase was primarily driven by the origination and servicing fees we earned from third party receivables. These fees were $2.7 million for the quarter ended March 31, 2023 compared to $844,000 in the prior year period. 25 Expenses . Our operating expenses consist largely of interest expense, provision for credit losses, employee costs, sales and general and administrative expenses. Provision for credit losses is affected by the balance and credit performance of our portfolio of finance receivables (other than our portfolio of finance receivables measured at fair value, as to which expected credit losses have the effect of reducing the internal rate of return or the recorded value applicable to such receivables). Interest expense is significantly affected by the volume of automobile contracts we purchased during the trailing 12-month period and the use of our warehouse facilities and asset-backed securitizations to finance those contracts. Employee costs and general and administrative expenses are incurred as applications and automobile contracts are received, processed and serviced. Factors that affect margins and net income include changes in the automobile and automobile finance market environments, and macroeconomic factors such as interest rates and changes in the unemployment level. Employee costs include base salaries, commissions and bonuses paid to employees, and certain expenses related to the accounting treatment of outstanding stock options and are one of our most significant operating expenses. These costs (other than those relating to stock options) generally fluctuate with the level of applications and automobile contracts purchased and serviced. Other operating expenses consist largely of facilities expenses, telephone and other communication services, credit services, computer services, sales and advertising expenses, and depreciation and amortization. Total operating expenses were $64.7 million for the three months ended March 31, 2023, compared to $45.0 million for the prior period, an increase of $19.6 million, or 43.6%. The increase is primarily due to increases in interest expense and general and administrative expenses. Employee costs were $22.0 million during the three months ended March 31, 2023 compared to $22.2 million for the same quarter in the prior year. The table below summarizes our employees by category as well as contract purchases and units in our managed portfolio as of, and for the three-month periods ended, March 31, 2023 and 2022: Three Months Ended March 30, 2023 2022 (Dollars in millions) Contracts purchased (dollars) $ 415.2 $ 410.0 Contracts purchased (units) 20,888 17,798 Managed portfolio outstanding (dollars) $ 2,881.8 $ 2,381.6 Managed portfolio outstanding (units) 175,197 158,844 Number of Originations staff 184 178 Number of Sales staff 108 125 Number of Servicing staff 401 374 Number of other staff 86 81 Total number of employees 779 758 General and administrative expenses include costs associated with purchasing and servicing our portfolio of finance receivables, including expenses for facilities, credit services, and telecommunications. General and administrative expenses was $11.4 million, an increase from $8.2 million in the previous year and represented 17.6% of total operating expenses. Interest expense for the three months ended March 31, 2023 was $32.8 million and represented 50.7% of total operating expenses, compared to $16.4 million in the previous year, when it was 36.4% of total operating expenses. Interest on securitization trust debt increased by $10.7 million for the three months ended March 31, 2023 compared to the prior period. The average balance of securitization trust debt increased to $2,283.3 million for the three months ended March 31, 2023 compared to $1,808.5 million for the three months ended March 31, 2022. The annualized average rate on our securitization trust debt was 4.2% for the three months ended March 31, 2023 compared to 3.0% in the prior year period. The blended interest rates on new term securitizations have been increasing since 2022. For each quarterly securitization transaction, the blended cost of funds is ultimately the result of many factors including the market interest rates for benchmark swaps of various maturities against which our bonds are priced and the margin over those benchmarks that investors are willing to accept, which in turn, is influenced by investor demand for our bonds at the time of the securitization. These and other factors have resulted in fluctuations in our securitization trust debt interest costs. The blended interest rates of our recent securitizations are summarized in the table below: 26 Period Blended Cost of Funds January 2020 3.08% June 2020 4.09% September 2020 2.39% January 2021 1.11% April 2021 1.65% July 2021 1.55% October 2021 2.09% January 2022 2.54% April 2022 4.83% July 2022 6.02% October 2022 8.48% January 2023 6.48% Interest expense on warehouse credit line debt increased by $3.1 million to $4.3 million for the three months ended March 31, 2023 compared to $1.2 million in the prior year period. The increase was due to the higher utilization of our credit lines during the quarter compared to last year. The average balance of our warehouse debt was $194.9 million during the three months ended March 31, 2023 compared to $66.5 million for the same period in 2022. Interest expense on subordinated renewable notes was $508,000 for the three months ended March 31, 2023. The average balance of the outstanding subordinated debt decreased 9.1% to $24.1 million for the three months ended March 31, 2023 compared to $26.5 million for the prior year. The average yield of subordinated notes decreased to 8.4% compared to 9.3% in the prior period. In May 2018 and June 2021, we completed two residual interest financings of our residual interests from previously issued securitizations in the amounts of $40.0 million and $50.0 million, respectively. Interest expense on these residual interest financings was $983,000 for the three months ended March 31, 2023 compared to $1.1 million in the prior year period. The following table presents the components of interest income and interest expense and a net interest yield analysis for the three-month periods ended March 31, 2023 and 2022: Three Months Ended March 31, 2023 2022 (Dollars in thousands) Annualized Annualized Average Average Average Average Balance (1) Interest Yield/Rate Balance (1) Interest Yield/Rate Interest Earning Assets Finance receivables gross (2) $ 78,729 $ 6,004 30.5% $ 206,197 $ 11,320 22.0% Finance receivables at fair value 2,777,869 74,058 10.7% 2,067,286 58,740 11.4% 2,856,598 80,062 11.2% 2,273,483 70,060 12.3% Interest Bearing Liabilities Warehouse lines of credit $ 194,918 4,303 8.8% $ 66,465 1,158 7.0% Residual interest financing 50,000 983 7.9% 51,978 1,094 8.4% Securitization trust debt 2,283,258 24,214 4.2% 1,808,501 13,528 3.0% Subordinated renewable notes 24,119 508 8.4% 26,526 620 9.3% $ 2,552,295 30,008 4.7% $ 1,953,470 16,400 3.4% Net interest income/spread $ 50,054 $ 53,660 Net interest yield (3) 6.5% 8.9% Ratio of average interest earning assets to average interest bearing liabilities 112% 116% (1) Average balances are based on month end balances except for warehouse lines of credit, which are based on daily balances. (2) Net of deferred fees and direct costs. (3) Annualized net interest income divided by average interest earning assets. 27 Three Months Ended March 31, 2023 Compared to March 31, 2022 Total Change Due Change Due Change to Volume to Rate (In thousands) Interest Earning Assets Finance receivables gross $ (5,316 ) $ (6,989 ) $ 1,673 Finance receivables at fair value 15,318 20,179 (4,861 ) 10,002 13,190 (3,188 ) Interest Bearing Liabilities Warehouse lines of credit 3,145 2,268 877 Residual interest financing (111 ) (48 ) (63 ) Securitization trust debt 10,686 3,836 6,850 Subordinated renewable notes (112 ) (52 ) (60 ) 13,608 6,004 7,604 Net interest income/spread $ (3,606 ) $ 7,186 $ (10,792 ) The annualized yield on our finance receivables was 11.2% for the three months ended March 31, 2023 and 12.3% for the same period in 2022. The interest yield on receivables measured at fair value is reduced to take account of expected losses and is therefore less than the yield on other finance receivables. The average balance of these fair value receivables was $2,777.9 million for the three months ended March 31, 2023 compared to $2,067.3 million in the prior year period. For the three months ended March 31, 2023, we recorded a reduction to provision for credit losses on finance receivables in the amount of $9.0 million. The reserve decrease was primarily due to a decrease in lifetime expected credit losses resulting from improved credit performance as our previous estimates for future losses exceeded actual incurred losses. This compares to $9.4 million in reductions to provision for credit losses for the three months ended March 31, 2022. Our evaluation of the allowance for credit losses indicated that the reserves against future losses are adequate as of March 31, 2023. Although we have not yet seen a meaningful deterioration in the credit performance for these receivables, worsening economic conditions, inflation and a reversion to the mean for used car pricing could negatively affect credit performance in the future. The allowance applies only to our finance receivables originated through December 2017, which we refer to as our legacy portfolio. Finance receivables that we have originated since January 2018 are accounted for at fair value. Under the fair value method of accounting, we recognize interest income net of expected credit losses. Thus, no provision for credit loss expense is recorded for finance receivables measured at fair value. Sales expense consists primarily of commission-based compensation paid to our employee sales representatives. Our sales representatives earn a salary plus commissions based on volume of contract purchases and sales of ancillary products and services that we offer our dealers. Sales expense increased to $5.7 million during the three months ended March 31, 2023 from $5.4 million in the same quarter in 2022. We purchased $415.2 million of new contracts during the three months ended March 31, 2023 compared to $410.0 million in the prior year period. Occupancy expenses was $1.5 million for the three months ending March 31, 2023, which is down from the $1.9 million in the first quarter of 2022. Depreciation and amortization expenses decreased to $231,000 compared to $417,000 in the previous year and represented 0.4% of total operating expenses. For the three months ended March 31, 2023, we recorded income tax expense of $4.6 million, representing a 25% effective tax rate. In the prior period, our income tax expense was $8.2 million, representing a 28% effective tax rate. 28 Credit Experience Our financial results are dependent on the performance of the automobile contracts in which we retain an ownership interest. Broad economic factors such as recession and significant changes in unemployment levels influence the credit performance of our portfolio, as does the weighted average age of the receivables at any given time. The tables below document the delinquency, repossession and net credit loss experience of all such automobile contracts that we originated or own an interest in as of the respective dates shown. Delinquency, Repossession and Extension Experience (1) Total Owned Portfolio March 31, 2023 March 31, 2022 December 31, 2022 Number of Number of Number of Contracts Amount Contracts Amount Contracts Amount (Dollars in thousands) Delinquency Experience Gross servicing portfolio (1) 175,197 $ 2,881,844 155,812 $ 2,324,354 170,658 $ 2,795,383 Period of delinquency (2) . 31-60 days 10,057 $ 151,743 8,451 $ 114,865 13,434 $ 201,764 61-90 days 4,306 62,577 3,384 44,966 5,481 80,145 91+ days 1,660 23,839 1,051 13,366 2,148 31,036 Total delinquencies (2) 16,023 238,159 12,886 173,197 21,063 312,946 Amount in repossession (3) 3,246 47,710 2,100 26,442 2,904 41,401 Total delinquencies and amount in repossession (2) 19,269 $ 285,869 14,986 $ 199,639 23,967 $ 354,347 Delinquencies as a percentage of gross servicing portfolio 9.1% 8.3% 8.3% 7.5% 12.3% 11.2% Total delinquencies and amount in repossession as a percentage of gross servicing portfolio 11.0% 9.9% 9.6% 8.6% 14.0% 12.7% Extension Experience Contracts with one extension, accruing 30,126 $ 530,950 23,338 $ 329,236 27,584 $ 464,323 Contracts with two or more extensions, accruing 38,838 431,936 43,894 475,413 38,714 417,682 68,964 962,886 67,232 804,649 66,298 882,005 Contracts with one extension, non-accrual (4) 1,072 16,770 591 7,632 981 14,792 Contracts with two or more extensions, non-accrual (4) 1,167 12,641 1,326 14,155 1,485 15,395 2,239 29,411 1,917 21,787 2,466 30,187 Total contracts with extensions 71,203 $ 992,297 69,149 $ 826,436 68,764 $ 912,192 ________________________ (1) All amounts and percentages are based on the amount remaining to be repaid on each automobile contract, including, for pre-computed automobile contracts, any unearned interest. The information in the table represents the gross principal amount of all automobile contracts we have purchased, including automobile contracts subsequently sold in securitization transactions that we continue to service. The table does not include certain contracts we have serviced for third parties on which we earn servicing fees only and have no credit risk. (2) 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. Automobile contracts less than 31 days delinquent are not included. The delinquency aging categories shown in the tables reflect the effect of extensions. (3) Amount in repossession represents financed vehicles that have been repossessed but not yet liquidated. (4) Amount in repossession and accounts past due more than 90 days are on non-accrual. 29 Net Charge-Off Experience (1) Total Owned Portfolio Finance Receivables Portfolio March 31, March 31, December 31, 2023 2022 2022 (Dollars in thousands) Average servicing portfolio outstanding $ 2,856,598 $ 2,273,483 $ 2,539,110 Annualized net charge-offs as a percentage of average servicing portfolio (2) 5.2% 3.3% 4.5% _________________________ (1) All amounts and percentages are based on the principal amount scheduled to be paid on each automobile contract, net of unearned income on pre-computed automobile contracts. (2) Net charge-offs include the remaining principal balance, after the application of the net proceeds from the liquidation of the vehicle (excluding accrued and unpaid interest) and amounts collected subsequent to the date of charge-off, including some recoveries which have been classified as other income in the accompanying interim consolidated financial statements. March 31, 2023 and March 31, 2022 percentages represent three months ended March 31, 2023 and March 31, 2022 annualized. December 31, 2022 represents 12 months ended December 31, 2022. Extensions In certain circumstances we will grant obligors one-month payment extensions to assist them with temporary cash flow problems. In general, we are bound by our securitization agreements to refrain from agreeing to more than two such extensions in any 12-month period and to more than six over the life of the contract. 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 some 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. Because financial regulatory authorities have encouraged obligors to expect payment deferrals as a response to the pandemic, we may seek amendments or waivers of our securitization agreements to relax the limits on extensions; however, we have not sought such changes in terms as of the date of this report, and if we do seek such changes, there can be no assurance that the other parties to our securitization agreements will agree to such amendments or waivers, nor as to the effect on credit performance that may result if such amendments or waivers are agreed to. The basic question in deciding to grant an extension is whether or not we will (a) be delaying the inevitable repossession and liquidation or (b) risk losing the vehicle as a result of not being able to locate the obligor and vehicle. In both of those situations, the loss would likely be higher than if the vehicle had been repossessed without the extension. The benefits of granting an extension include minimizing current losses and delinquencies, minimizing lifetime losses, getting the obligor’s account current (or close to it) and building goodwill so that the obligor might prioritize us over other creditors on future payments. Our servicing staff are trained to identify when a past due obligor is facing a temporary problem that may be resolved with an extension. In some cases, the extension will be granted in conjunction with our receiving all or a portion of a past due payment from the obligor, thereby indicating an additional monetary and psychological commitment to the contract on the obligor’s part. The credit assessment for granting an extension is initially made by our collector, who bases the recommendation on the collector’s discussions with the obligor. In such assessments the collector will consider, among other things, the following factors: (1) the reason the obligor has fallen behind in payment; (2) whether or not the reason for the delinquency is temporary, and if it is, have conditions changed such that the obligor can begin making regular monthly payments again after the extension; (3) the obligor's past payment history, including past extensions if applicable; (4) the obligor’s willingness to communicate and cooperate on resolving the delinquency; and (5) a numeric score from our internal risk assessment system that indicating the likelihood that the extension will prove beneficial. If the collector believes the obligor is a good candidate for an extension, an approval is obtained from a supervisor, who will review the same factors stated above prior to offering the extension to the obligor. After receiving an extension, an account remains subject to our normal policies and procedures for interest accrual, reporting delinquency and recognizing charge-offs. 30 We believe that a prudent extension program is an integral component to mitigating losses in our portfolio of sub-prime automobile receivables. The table below summarizes the status, as of March 31, 2023, for accounts that received extensions from 2008 through 2021: Period of Extension # Extensions Granted Active or Paid Off at March 31, 2023 % Active or Paid Off at March 31, 2023 Charged Off > 6 Months After Extension % Charged Off > 6 Months After Extension Charged Off <= 6 Months After Extension % Charged Off <= 6 Months After Extension Avg Months to Charge Off Post Extension 2008 35,588 10,708 30.1% 20,060 56.4% 4,819 13.5% 19 2009 32,226 10,273 31.9% 16,168 50.2% 5,783 17.9% 17 2010 26,167 12,159 46.5% 12,006 45.9% 1,999 7.6% 19 2011 18,786 10,972 58.4% 6,882 36.6% 932 5.0% 19 2012 18,783 11,320 60.3% 6,667 35.5% 796 4.2% 18 2013 23,398 11,143 47.6% 11,279 48.2% 976 4.2% 23 2014 25,773 10,477 40.7% 14,470 56.1% 826 3.2% 25 2015 53,319 22,308 41.8% 29,929 56.1% 1,082 2.0% 26 2016 80,897 36,583 45.2% 42,381 52.4% 1,933 2.4% 26 2017 133,881 60,862 45.5% 66,093 49.4% 6,926 5.2% 22 2018 121,531 65,205 53.7% 50,319 41.4% 6,007 4.9% 19 2019 71,548 50,037 69.9% 19,569 27.4% 1,942 2.7% 18 2020 83,170 63,400 76.2% 14,354 17.3% 2,099 2.5% 15 2021 47,029 39,063 83.1% 6,565 14.0% 1,236 2.6% 11 _________________ Note: Table excludes extensions on portfolios serviced for third parties We view these results as a confirmation of the effectiveness of our extension program. For example, of the accounts granted extensions in 2019, 69.9% were either paid in full or active and performing as of March 31, 2023. Each of these successful accounts represent continued payments of interest and principal (including payment in full in many cases), where without the extension we likely would have incurred a substantial loss and no interest revenue after the extension. For the extension accounts that ultimately charge off, we consider any that charged off more than six months after the extension to be at least partially successful. For example, of the accounts granted extensions in 2012 that subsequently charged off, such charge offs occurred, on average, 18 months after the extension, indicating that even in the cases of an ultimate loss, the obligor serviced the account with additional payments of principal and interest. 31 Additional information about our extensions is provided in the tables below: Three Months Ended March 31, Year Ended December 31, Three Months Ended March 31, 2023 2022 2022 Average number of extensions granted per month 6,089 4,869 4,061 Average number of outstanding accounts 173,731 162,264 154,729 Average monthly extensions as % of average outstandings 3.5% 3.0% 2.6% _________________ Note: Table excludes portfolios originated and owned by third parties March 31, 2023 March 31, 2022 December 31, 2022 Number of Contracts Amount Number of Contracts Amount Number of Contracts Amount (Dollars in thousands) Contracts with one extension 31,198 $ 547,720 23,929 $ 336,868 28,565 $ 479,114 Contracts with two extensions 14,365 201,960 14,834 185,348 13,730 180,547 Contracts with three extensions 9,557 105,955 11,271 129,519 9,837 108,986 Contracts with four extensions 7,672 72,951 8,810 88,758 7,938 76,219 Contracts with five extensions 5,295 43,085 6,195 54,982 5,425 45,519 Contracts with six extensions 3,116 20,626 4,110 30,960 3,269 21,806 71,203 $ 992,297 69,149 $ 826,435 68,764 $ 912,191 Managed portfolio (excluding originated and owned by 3rd parties) 166,370 $ 2,687,308 156,456 $ 2,184,142 154,151 $ 2,209,430 _________________ Note: Table excludes portfolios originated and owned by third parties Since 2019, we have been able to reduce extensions by working with our servicing staff to be more selective in granting extensions including, where appropriate, to exhaust all possibilities of payment by the customer before granting an extension. However, as delinquency rates have risen, so has the average number of extensions granted. Non-Accrual Receivables It is not uncommon for our obligors to fall behind in their payments. However, with the diligent efforts of our Servicing staff and systems for managing our collection efforts, we regularly work with our customers to resolve delinquencies. Our staff are trained to employ a counseling approach to assist our customers with their cash flow management skills and help them to prioritize their payment obligations in order to avoid losing their vehicle to repossession. Through our experience, we have learned that once a customer becomes greater than 90 days past due, it is not likely that the delinquency will be resolved and will ultimately result in a charge-off. As a result, we do not recognize any interest income for contracts that are greater than 90 days past due. If a contract exceeds the 90 days past due threshold at the end of one period, and then makes the necessary payments such that it becomes less than or equal to 90 days delinquent at the end of a subsequent period, it would be restored to full accrual status for our financial reporting purposes. At the time a contract is restored to full accrual in this manner, there can be no assurance that full repayment of interest and principal will ultimately be made. However, we monitor each obligor’s payment performance and are aware of the severity of his delinquency at any time. The fact that the delinquency has been reduced below the 90-day threshold is a positive indicator. Should the contract again exceed the 90-day delinquency level at the end of any reporting period, it would again be reflected as a non-accrual account. 32 Our policy for placing a contract on non-accrual status is independent of our policy to grant an extension. In practice, it would be an uncommon circumstance where an extension was granted and the account remained in a non-accrual status, since the goal of the extension is to bring the contract current (or nearly current). Liquidity and Capital Resources Our business requires substantial cash to support our purchases of automobile contracts and other operating activities. Our primary sources of cash have been cash flows from the proceeds from term securitization transactions and other sales of automobile contracts, amounts borrowed under various revolving credit facilities (also sometimes known as warehouse credit facilities), customer payments of principal and interest on finance receivables, fees for origination of automobile contracts, and releases of cash from securitization transactions and their related spread accounts. Our primary uses of cash have been the purchases of automobile contracts, repayment of amounts borrowed under lines of credit, securitization transactions and otherwise, operating expenses such as employee, interest, occupancy expenses and other general and administrative expenses, the establishment of spread accounts and initial overcollateralization, if any, the increase of credit enhancement to required levels in securitization transactions, and income taxes. There can be no assurance that internally generated cash will be sufficient to meet our cash demands. The sufficiency of internally generated cash will depend on the performance of securitized pools (which determines the level of releases from those pools and their related spread accounts), the rate of expansion or contraction in our managed portfolio, and the terms upon which we are able to acquire and borrow against automobile contracts. Net cash provided by operating activities for the three-month period ended March 31, 2023 was $65.1 million, a decrease of $3.2 million, compared to net cash provided by operating activities for the three-month period ended March 31, 2022 of $68.3 million. Net cash from operating activities is generally provided by net income from operations adjusted for significant non-cash items such as our provision for credit losses and marks to finance receivables measured at fair value. Net cash used in investing activities was $121.2 million for the three months ended March 31, 2023 compared to $139.5 million in the prior year period. Net cash used in investing activities generally relates to new purchases of automobile contracts net of principal payments and other proceeds received during the period. Purchases of finance receivables excluding acquisition fees were $353.9 million and $393.4 million during the first three months of 2023 and 2022, respectively. Net cash provided by financing activities for the three months ended March 31, 2023 was $62.3 million compared to $80.9 million in the prior year period. Cash provided by financing activities is primarily related to the issuance of securitization trust debt, reduced by the amount of repayment of securitization trust debt and net proceeds or repayments on our warehouse lines of credit and other debt. In the first three months of 2023, we issued $324.8 million in new securitization trust debt compared to $316.8 million for the same period in 2022. We repaid $258.2 million in securitization trust debt in the three months ended March 31, 2023 compared to repayments of securitization trust debt of $262.7 million in the prior year period. In the three months ended March 31, 2023, we had net repayments on warehouse lines of credit of $7,000, compared to net proceeds from warehouse lines of credit of $42.2 million in the prior year’s period. We purchase automobile contracts from dealers for a cash price approximately equal to their principal amount, adjusted for an acquisition fee which may either increase or decrease the automobile contract purchase price. Those automobile contracts generate cash flow, however, over a period of years. We have been dependent on warehouse credit facilities to purchase automobile contracts and our securitization transactions for long term financing of our contracts. In addition, we have accessed other sources, such as residual financings and subordinated debt in order to finance our continuing operations. The acquisition of automobile contracts for subsequent financing in securitization transactions, and the need to fund spread accounts and initial overcollateralization, if any, and increase credit enhancement levels when those transactions take place, results in a continuing need for capital. The amount of capital required is most heavily dependent on the rate of our automobile contract purchases, the required level of initial credit enhancement in securitizations, and the extent to which the previously established trusts and their related spread accounts either release cash to us or capture cash from collections on securitized automobile contracts. Of those, the factor most subject to our control is the rate at which we purchase automobile contracts. We are and may in the future be limited in our ability to purchase automobile contracts due to limits on our capital. As of March 31, 2023, we had unrestricted cash of $10.2 million and $114.2 million aggregate available borrowings under our two warehouse credit facilities (assuming the availability of sufficient eligible collateral). As of March 31, 2023, we had approximately $26.4 million of such eligible collateral. Our plans to manage our liquidity include maintaining our rate of automobile contract purchases at a level that matches our available capital, and, as appropriate, minimizing our operating costs. During the three-month period ended March 31, 2023, we completed one securitization aggregating $324.8 million of notes sold. 33 Our liquidity will also be affected by releases of cash from the trusts established with our securitizations. While the specific terms and mechanics of each spread account vary among transactions, our securitization agreements generally provide that we will receive excess cash flows, if any, only if the amount of credit enhancement has reached specified levels and the net losses related to the automobile contracts in the pool are below certain predetermined levels. In the event delinquencies or net losses on the automobile contracts exceed such levels, the terms of the securitization may require increased credit enhancement to be accumulated for the particular pool. There can be no assurance that collections from the related trusts will continue to generate sufficient cash. 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 of our debt agreements other than our term securitizations contain cross-default provisions. Such cross-default provisions would allow the respective creditors to declare a default if an event of default occurred with respect to other indebtedness of ours, but only if such other event of default were to be accompanied by acceleration of such other indebtedness. As of March 31, 2023, we were in compliance with all such financial covenants. We have and will continue to have a substantial amount of indebtedness. At March 31, 2023, we had approximately $2,534.0 million of debt outstanding. Such debt consisted primarily of $2,175.1 million of securitization trust debt and $285.8 million of debt from warehouse lines of credit. Our securitization trust debt has increased by $66.3 million while our warehouse lines of credit debt has increased by $481,000 since December 31, 2022 (each net of deferred financing costs). Since 2005, we have offered renewable subordinated notes to the public on a continuous basis, and such notes have maturities that range from six months to 10 years. We had $23.4 million and $25.3 million in subordinated renewable notes outstanding at March 31, 2023 and December 31, 2022, respectively. On June 30, 2021, we completed a $50.0 million securitization of residual interests from other previously issued securitizations. As of March 31, 2023, all $50.0 million of this debt remains outstanding. Although we believe we are able to service and repay our debt, there is no assurance that we will be able to do so. If our plans for future operations do not generate sufficient cash flows and earnings, our ability to make required payments on our debt would be impaired. If we fail to pay our indebtedness when due, it could have a material adverse effect on us and may require us to issue additional debt or equity securities. Forward Looking Statements This report on Form 10-Q includes certain “forward-looking statements.” Forward-looking statements may be identified by the use of words such as “anticipates,” “expects,” “plans,” “estimates,” or words of like meaning. Our provision for credit losses is a forward-looking statement, as it is dependent on our estimates as to future chargeoffs and recovery rates. Factors that could affect charge-offs and recovery rates include changes in the general economic climate, which could affect the willingness or ability of obligors to pay pursuant to the terms of automobile contracts, changes in laws respecting consumer finance, which could affect our ability to enforce rights under automobile contracts, and changes in the market for used vehicles, which could affect the levels of recoveries upon sale of repossessed vehicles. Our valuation of receivables measured at fair value is a forward-looking statement, as it is dependent, among other things, on our estimates of cash to be received in the future with respect to such receivables. Each of the factors listed above as affecting charge-offs and recovery rates could have a similar effect on cash to be received in the future with respect to receivables measured at fair value. Factors that could affect our revenues in the current year include the levels of cash releases from existing pools of automobile contracts, which would affect our ability to purchase automobile contracts, the terms on which we are able to finance such purchases, the willingness of dealers to sell automobile contracts to us on the terms that we offer, and the terms on which and whether we are able to complete term securitizations once automobile contracts are acquired. Factors that could affect our expenses in the current year include competitive conditions in the market for qualified personnel and interest rates (which affect the rates that we pay on notes issued in our securitizations). The factors identified in this and other reports as “Risk Factors” could affect our revenues, expenses, liquidity and financial condition, and the timing and amount of cash received with respect to our automobile contracts. Item 4. Controls and Procedures We maintain a system of internal controls and procedures designed to provide reasonable assurance as to the reliability of our published financial statements and other disclosures included in this report. As of the end of the period covered by this report, we evaluated the effectiveness of the design and operation of such disclosure controls and procedures. Based upon that evaluation, the principal executive officer (Charles E. Bradley, Jr.) and the principal financial officer (Denesh Bharwani) concluded that the disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, material information relating to us that is required to be included in our reports filed under the Securities Exchange Act of 1934. There has been no change in our internal controls over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 34 PART II — OTHER INFORMATION Item 1. Legal Proceedings The information provided under the caption “Legal Proceedings,” Note 8 to the Unaudited Condensed Consolidated Financial Statements, included in Part I of this report, is incorporated herein by reference. Item 1A. Risk Factors We remind the reader that risk factors are set forth in Item 1A of our report on Form 10-K, filed with the U.S. Securities and Exchange Commission on March 15, 2023. Where we are aware of material changes to such risk factors as previously disclosed, we set forth below an updated discussion of such risks. The reader should note that the other risks identified in our report on Form 10-K remain applicable. We have substantial indebtedness. We have and will continue to have a substantial amount of indebtedness. At March 31, 2023, we had approximately $2,534.0 million of debt outstanding. Such debt consisted primarily of $2,175.1 million of securitization trust debt and $285.8 million of debt from warehouse lines of credit. Our securitization trust debt has increased by $66.3 million while our warehouse lines of credit debt has increased by $481,000 since December 31, 2022 (each net of deferred financing costs). Since 2005, we have offered renewable subordinated notes to the public on a continuous basis, and such notes have maturities that range from six months to 10 years. We had $23.4 million and $25.3 million in subordinated renewable notes outstanding at March 31, 2023 and December 31, 2022, respectively. On June 30, 2021, we completed a $50.0 million securitization of residual interests from other previously issued securitizations. As of March 31, 2023, all $50.0 million of this debt remains outstanding. Our substantial indebtedness could adversely affect our financial condition by, among other things: · increasing our vulnerability to general adverse economic and industry conditions; · requiring us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing amounts available for working capital, capital expenditures and other general corporate purposes; · limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; · placing us at a competitive disadvantage compared to our competitors that have less debt; and · limiting our ability to borrow additional funds. Although we believe we are able to service and repay such debt, there is no assurance that we will be able to do so. If we do not generate sufficient operating profits, our ability to make required payments on our debt would be impaired. Failure to pay our indebtedness when due could have a material adverse effect. Forward-Looking Statements Discussions of certain matters contained in this report may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Exchange Act, and as such, may involve risks and uncertainties. These forward-looking statements relate to, among other things, expectations of the business environment in which we operate, projections of future performance, perceived opportunities in the market and statements regarding our mission and vision. You can generally identify forward-looking statements as statements containing the words "will," "would," "believe," "may," "could," "expect," "anticipate," "intend," "estimate," "assume" or other similar expressions. Our actual results, performance and achievements may differ materially from the results, performance and achievements expressed or implied in such forward-looking statements. The discussion under "Risk Factors" identifies some of the factors that might cause such a difference, including the following: 35 · changes in general economic conditions; · our ability or inability to obtain necessary financing, and the terms of any such financing; · changes in interest rates, especially as applicable to securitization trust debt; · our ability to generate sufficient operating and financing cash flows; · competition; · level of future provisioning for receivables losses; · the levels of actual losses on receivables; and · regulatory requirements. Forward-looking statements in this report also include our recorded figures representing allowances for remaining expected lifetime credit losses, our markdown of the recorded value for the portion of our portfolio accounted for at fair value, our charge to the provision for credit losses for the our legacy portfolio, our estimates of fair value (most significantly for our receivables accounted for at fair value), our entries offsetting the preceding, and figures derived from any of the preceding. In each case, such figures are forward-looking statements because they are dependent on our estimates of cash to be received and losses to be incurred in the future. The accuracy of such estimates may be adversely affected by various factors, which include (in addition to risks relating to the COVD-19 pandemic and to the economy generally) the following: possible increased delinquencies; repossessions and losses on retail installment contracts; incorrect prepayment speed and/or discount rate assumptions; possible unavailability of qualified personnel, which could adversely affect our ability to service our portfolio; possible increases in the rate of consumer bankruptcy filings, which could adversely affect our rights to collect payments from our portfolio; other changes in government regulations affecting consumer credit; possible declines in the market price for used vehicles, which could adversely affect our realization upon repossessed vehicles; and economic conditions in geographic areas in which the Company's business is concentrated. The accuracy of such estimates may also be affected by the effects of the COVID-19 pandemic and of governmental responses to said pandemic, which have included prohibitions on certain means of enforcement of receivables, and may include additional restrictions, as yet unknown, in the future. Any or all of such factors also may affect our future financial results, as to which there can be no assurance. Any implication that past results or past consecutive earnings are indicative of future results or future earnings is disclaimed, and the reader should draw no such inference. Factors such as those identified above in relation to losses to be incurred in the future may affect future performance. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Actual results may differ from expectations due to many factors beyond our ability to control or predict, including those described herein, and in documents incorporated by reference in this report. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. We undertake no obligation to publicly update any forward-looking information. You are advised to consult any additional disclosure we make in our periodic reports filed with the SEC. 36 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the three months ended March 31, 2023, we repurchased 263,185 shares from existing shareholders, as reflected in the table below. Issuer Purchases of Equity Securities Total Number of Average Total Number of Shares Purchased as Part of Publicly Approximate Dollar Value of Shares that May Yet be Purchased Shares Price Paid Announced Plans or Under the Plans or Period(1) Purchased per Share Programs Programs (2) January 2023 42,327 $ 9.25 42,327 $ 7,950,921 February 2023 86,444 $ 11.31 86,444 $ 6,972,901 March 2023 134,414 $ 10.22 134,414 $ 5,599,077 Total 263,185 $ 10.42 263,185 ____________________ (1) Each monthly period is the calendar month. (2) Through March 31, 2023, our board of directors had authorized the purchase of up to $103.2 million of our outstanding securities, under a program first announced in our annual report for the year 2002, filed on June 26, 2003. All purchases described in the table above were under the program announced in June 2003, which has no fixed expiration date. Item 6. Exhibits The Exhibits listed below are filed with this report. 4.14 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. 31.1 Rule 13a-14(a) Certification of the Chief Executive Officer of the registrant . 31.2 Rule 13a-14(a) Certification of the Chief Financial Officer of the registrant . 32 Section 1350 Certifications .* * These Certifications shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. These Certifications shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registration statement specifically states that such Certifications are incorporated therein. 37 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CONSUMER PORTFOLIO SERVICES, INC. (Registrant) Date: May 10, 2023 By: /s/ CHARLES E. BRADLEY, JR. Charles E. Bradley, Jr. Chief Executive Officer (Principal Executive Officer) Date: May 10, 2023 By: /s/ DENESH BHARWANI Denesh Bharwani Executive Vice President and Chief Financial Officer (Principal Financial Officer) 38