CONSUMER PORTFOLIO SERVICES, INC. (CPSS)

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, to a lesser extent, originate loans directly to consumers for the refinancing of an existing loan from
other lenders secured by an automobile and have also (i) originated vehicle purchase money loans by lending directly to consumers, (ii)
acquired installment purchase contracts in four merger and acquisition transactions, and (iii) 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 June 30, 2026, we have originated a total of approximately $26.0 billion of automobile
contracts from dealers, and to a lesser degree, by originating loans secured by automobiles directly with consumers. Our recent history
of contract purchase volumes and managed portfolio levels are shown in the table below. Managed portfolio comprises both contracts we
owned and those we were servicing for third parties.

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, Nevada, and
Virginia 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.

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 or reverse expense
provisions for credit losses.

Since 1994 we have conducted
109 term securitizations of automobile contracts that we originated. As of June 30, 2026, 19 of those securitizations are active and all
are structured as secured financings. We generally conduct our securitizations on a quarterly basis, near the beginning of each calendar
quarter, resulting in four securitizations per calendar year.

Our recent history of term securitizations
is summarized in the table below:

Generally, prior to a securitization
transaction we fund our automobile contract purchases primarily with proceeds from warehouse credit facilities. As of June 30, 2026 our
short-term funding capacity was $725.0 million over two credit facilities. The first credit facility was established in May 2012.

In October 2025, we entered
into a new $167.5 million facility. On April 3, 2026, it amended its two-year revolving credit agreement with Capital One, N.A. to increase
the capacity of the facility. The amendment applies to both Capital One, N.A. and the subordinate lender, and increases the capacity of
the facility from $167.5 million to $390 million. This facility has a two-year revolving period to October 2027, with an optional amortization
period through April 2029.

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 may be required 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.

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.

In addition, from time to time,
we have also completed financings of our residual interests in other securitizations that we and our affiliates previously sponsored.
Most recently, in March 2026, we completed a $50 million securitization of residual interests from previously issued securitizations.
In the transaction, qualified institutional buyers purchased $50.0 million of asset-backed notes secured by an 80% interest in a CPS affiliate
that owns the residual interests in four CPS securitizations issued from January 2025 through October 2025. The sold notes (“2026-1
Notes”), issued by CPS Auto Securitization Trust 2026-1, consist of a single class with a coupon of 8.75%.

Receivables we originate and
service for third parties are not pledged to our warehouse facilities or included in our securitizations.

Financial Covenants

Our
warehouse credit facilities and our residual interest financings contain various financial covenants requiring certain minimum financial
ratios. Such covenants include maintaining minimum levels of liquidity and net worth and not exceeding maximum leverage levels. In addition,
certain securitization and non-securitization related debt contain cross-default provisions that would allow certain creditors to declare
a default if a default occurred under a different facility. As of June 30, 2026 we were in compliance with all such financial covenants.

Results
of Operations

Comparison of Operating Results
for the three months ended June 30, 2026, with the three months ended June 30, 2025

Revenues. During
the three months ended June 30, 2026, our revenues were $121.4 million, an increase of $11.6 million, or 10.6% from the prior year
revenue of 109.8 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 June
30, 2026, did not include a mark to the recorded value of the finance receivables measured at fair value. 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. In the current period, our re-evaluation of the fair
values of these receivables resulted in no marks to finance receivables measured at fair value. There was a $3.0 million mark up to
the fair value portfolio in the prior year period.

Interest income for the three
months ended June 30, 2026, increased $12.8 million, or 12.1% to $118.1 million from $105.4 million in the prior year. The primary reason
for the increase in interest income is the 13.7% increase in the average balance of our loan portfolio over the prior year period. The
interest yield on our total loan portfolio decreased to 11.3% from 11.4% in the prior year period. 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 table
below shows the average balance and interest yield of our loan portfolio for the three months ended June 30, 2026 and 2025:

Other income was $3.3 million for the three mont

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Item 7.  Management’s Discussion and Analysis
of Financial Condition and Results of Operations

The following discussion
of our financial condition and results of operations for the years ended December 31, 2025 and 2024 should be read in conjunction with
our consolidated financial statements and the notes to those statements that are included elsewhere in this Annual Report on Form 10-K.
Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our
plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated
in these forward-looking statements as a result of a number of factors. We use words such as anticipate, estimate, plan, project, continuing,
ongoing, expect, believe, intend, may, will, should, could, and similar expressions to identify forward-looking statements. See “Cautionary
Note Regarding Forward-Looking Statements.”

Discussions of 2023 items
and year-to-year comparisons between 2024 and 2023 that are not included in this Form 10-K can be found in “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” in Item 7 of the Company’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2024.

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 have (i) originated vehicle purchase money loans by lending directly to consumers, (ii) acquired installment
purchase contracts in four merger and acquisition transactions, and (iii) 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 December 31, 2025, we have purchased a total of approximately $24.7 billion of automobile
contracts from dealers. Contract purchase volumes and managed portfolio levels for the five years ended December 31, 2025 are shown in
the table below. Managed portfolio comprises both contracts we owned and those we were servicing for third parties.

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 our California branch with certain of these functions also performed in our Florida, Nevada, and
Virginia 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.

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 before
2018, we also periodically record as expense a provision for credit losses on the contracts; 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.

Since 1994 we have conducted
107 term securitizations of automobile contracts that we originated under our regular programs. As of December 31, 2025, 19 of those securitizations
are active and all are structured as secured financings. We generally conduct our securitizations on a quarterly basis, near the beginning
of each calendar quarter, resulting in four securitizations per calendar year.

Our recent history of term securitizations is summarized
in the table below:

Generally, prior to a securitization
transaction we fund our automobile contract acquisitions primarily with proceeds from warehouse credit facilities. Our current short-term
funding capacity is $702.5 million, comprising three credit facilities. The first credit facility was established in May 2012. This facility
was most recently renewed in July 2024, extending the revolving period to July 2026, with an optional amortization period through July
2027. In addition, the capacity was increased from $200 million to $335 million in December 2024.

In November 2015, we entered
into a $100 million facility with Ares Agent Services, L.P. In June 2022, we increased the capacity of our credit agreement from $100
million to $200 million. This facility was most recently renewed in March 2024, extending the revolving period to March 2026, followed
by an amortization period to March 2028.

In October 2025, we entered
into a new $167.5 million facility. This facility has a two year revolving period to October 2027, with an optional amortization period
through April 2029.

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.

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.

Critical Accounting Estimates

We believe that our
accounting policies related to Finance Receivables at Fair Value and Term Securitizations are the most critical to understanding and
evaluating our reported financial results. Such policies are described below.

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 re-evaluation were to yield a value materially different from the
recorded value, an adjustment, which we also refer to as a mark, would be required. Results for the years ended December 31, 2025, and
2024 include marks of $6.5 and $21.0 million, respectively, to the carrying value of the portion of the receivables portfolio accounted
for 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.

Anticipated credit losses are included in our
estimation of cash to be received with respect to receivables. In accordance with the fair value accounting standards, credit losses are
included in our computation of the appropriate level yield, therefore 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 fe

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