CONSUMER PORTFOLIO SERVICES, INC. 10-Q

Item 1. Financial Statements CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) 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