What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-01 compared with 2021-07-29 · 123 added, 117 removed, 393 unchanged (38% of the section changed)

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and from sales to customers responding to advertisements for our financing programs, but who actually end up qualifying for traditional financing.

For the three months ended June 30, 2021, consolidated net income was $288.6 million, or $17.18 per diluted share, compared to consolidated net income of $96.4 million, or $5.40 per diluted share, for the same period in 2020 primarily due to a decrease in provision for credit losses and an increase in finance charges.

The decrease in provision for credit losses was primarily due to an improvement in forecasted future net cash flows from our Loan portfolio and a decrease in new Consumer Loan assignment volume.

For the three months ended September 30, 2021, consolidated net income was $250.0 million, or $15.79 per diluted share, compared to consolidated net income of $242.1 million, or $13.56 per diluted share, for the same period in 2020 primarily due to an increase in finance charges, partially offset by a smaller reversal of provision for credit losses.

The increase in finance charges was primarily due to an increase in the average yield on our Loan portfolio, which was primarily the result of the adoption of CECL on January 1, 2020.

For the six months ended June 30, 2021, consolidated net income was $490.7 million, or $28.96 per diluted share, compared to consolidated net income of $12.6 million, or $0.70 per diluted share, for the same period in 2020 primarily due to a decrease in provision for credit losses and an increase in finance charges.

The decrease in provision for credit losses was primarily due to an improvement in forecasted future net cash flows from our Loan portfolio as we (1) increased our current year estimate of future net cash flows to reflect an improvement in Consumer Loan performance and (2) reduced our prior year estimate of future net cash flows in the first quarter of 2020 to reflect the estimated long-term impact of COVID-19 on Consumer Loan performance.

The smaller reversal of provision for credit losses was primarily due to a smaller improvement in Consumer Loan performance, partially offset by a decrease in new Consumer Loan assignment volume.

Our results for the three months ended September 30, 2021 included:

• An increase in forecasted collection rates for Consumer Loans assigned in 2018 through 2021, which increased forecasted net cash flows from our loan portfolio by $82.3 million.

• Forecasted profitability per Consumer Loan assignment that is in excess of our initial estimate for Consumer Loans assigned in 2021 and significantly in excess of our initial estimates for Consumer Loans assigned in 2018 through 2020.

• A decline in Consumer Loan assignment volume, as unit and dollar volumes declined 29.4% and 17.9%, respectively, as compared to the third quarter of 2020.

• Stock repurchases of approximately 1.3 million shares, which represented 8.0% of the shares outstanding at the beginning of the quarter.

For the nine months ended September 30, 2021, consolidated net income was $740.7 million, or $44.73 per diluted share, compared to consolidated net income of $254.7 million, or $14.17 per diluted share, for the same period in 2020 primarily due to a decrease in provision for credit losses and an increase in finance charges.

The decrease in provision for credit losses was primarily due to an improvement in Consumer Loan performance and a decrease in new Consumer Loan assignment volume.

The increase in finance charges was primarily due to an increase in the average yield on our Loan portfolio, which was primarily the result of the adoption of CECL on January 1, 2020.

Although the immediate impact of the COVID-19 virus has subsided, the impact of the COVID-19 pandemic on our business continues to be significant.

Starting in mid-March 2020, we experienced a substantial reduction in demand for our product and a significant decline in cash flows from our loan portfolio that lasted through mid-April 2020, after which collections and new loan volumes improved significantly.

Starting in late July 2020 and continuing through February 2021, we experienced another substantial reduction in demand for our product as federal stimulus and enhanced unemployment benefit payments lapsed, dealer inventories declined and used vehicle prices increased.

Demand for our product improved again in March and April 2021 as additional federal stimulus payments were distributed.

Starting in May 2021 and continuing through July 2021, we experienced another significant decline in demand for our product.

We believe that this decline is primarily due to low dealer inventories and further increases in used vehicle prices, which we believe are primarily due to the downstream impact of supply chain disruptions in the automotive industry.

Our results for the nine months ended September 30, 2021 included:

• An increase in forecasted collection rates for Consumer Loans assigned in 2017 through 2021, which increased forecasted net cash flows from our loan portfolio by $294.2 million.

• Forecasted profitability per Consumer Loan assignment that is consistent with our initial estimate for Consumer Loans assigned in 2021 and significantly in excess of our initial estimates for Consumer Loans assigned in 2018 through 2020.

• A decline in Consumer Loan assignment volume, as unit and dollar volumes declined 21.1% and 13.1%, respectively, as compared to the same period of 2020.

• Stock repurchases of approximately 2.3 million shares, which represented 13.3% of the shares outstanding at the beginning of the year.

Critical Success Factors

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By comparing our current expected collection rate for each Consumer Loan with the rate we projected at the time of assignment, we are able to assess the accuracy of our initial forecast.

The following table compares our forecast of Consumer Loan collection rates as of June 30, 2021 with the forecasts as of March 31, 2021, as of December 31, 2020 and at the time of assignment, segmented by year of assignment:

The following table compares our forecast of Consumer Loan collection rates as of September 30, 2021 with the forecasts as of June 30, 2021, as of December 31, 2020 and at the time of assignment, segmented by year of assignment:

Forecasted Collection Percentage as of (1) Current Forecast Variance from

Consumer Loan Assignment Year June 30, 2021 March 31, 2021 December 31, 2020 Initial Forecast March 31, 2021 December 31, 2020 Initial Forecast

Consumer Loan Assignment Year September 30, 2021 June 30, 2021 December 31, 2020 Initial Forecast June 30, 2021 December 31, 2020 Initial Forecast

2012 73.8 % 73.8 % 73.8 % 71.4 % 0.0 % 0.0 % 2.4 %

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Forecasted collection rates are negatively impacted by canceled Consumer Loans as the contractual amount owed is not removed from the denominator for purposes of computing forecasted collection rates in the table.

(2) The forecasted collection rate for 2021 Consumer Loans as of June 30, 2021 includes both Consumer Loans that were in our portfolio as of March 31, 2021 and Consumer Loans assigned during the most recent quarter.

(2) The forecasted collection rate for 2021 Consumer Loans as of September 30, 2021 includes both Consumer Loans that were in our portfolio as of June 30, 2021 and Consumer Loans assigned during the most recent quarter.

The following table provides forecasted collection rates for each of these segments:

Forecasted Collection Percentage as of Current Forecast Variance from

2021 Consumer Loan Assignment Period June 30, 2021 March 31, 2021 Initial Forecast March 31, 2021 Initial Forecast

January 1, 2021 through March 31, 2021 65.3 % 64.8 % 64.9 % 0.5 % 0.4 %

April 1, 2021 through June 30, 2021 66.5 % — 66.7 % — -0.2 %

Consumer Loans assigned in 2012, 2013 and 2018 through 2020 have yielded forecasted collection results materially better than our initial estimates, while Consumer Loans assigned in 2015 and 2016 have yielded forecasted collection results materially worse than our initial estimates.

2021 Consumer Loan Assignment Period September 30, 2021 June 30, 2021 Initial Forecast June 30, 2021 Initial Forecast

January 1, 2021 through June 30, 2021 66.4 % 65.8 % 65.7 % 0.6 % 0.7 %

July 1, 2021 through September 30, 2021 66.4 % — 66.9 % — -0.5 %

Consumer Loans assigned in 2012, 2013 and 2018 through 2020 have yielded forecasted collection results significantly better than our initial estimates, while Consumer Loans assigned in 2015 and 2016 have yielded forecasted collection results significantly worse than our initial estimates.

For all other assignment years presented, actual results have been close to our initial estimates.

For the three months ended June 30, 2021, forecasted collection rates improved for Consumer Loans assigned in 2017 through 2021 and were generally consistent with expectations at the start of the period for all other assignment years presented.

For the six months ended June 30, 2021, forecasted collection rates improved for Consumer Loans assigned in 2017 through 2020 and were generally consistent with expectations at the start of the period for all other assignment years presented.

The changes in forecasted collection rates for the three and six months ended June 30, 2021 and 2020 impacted forecasted net cash flows (forecasted collections less forecasted Dealer Holdback payments) as follows:

(In millions) For the Three Months Ended June 30, For the Six Months Ended June 30,

For the three months ended September 30, 2021, forecasted collection rates improved for Consumer Loans assigned in 2018 through 2021 and were generally consistent with expectations at the start of the period for all other assignment years presented.

For the nine months ended September 30, 2021, forecasted collection rates improved for Consumer Loans assigned in 2017 through 2021 and were generally consistent with expectations at the start of the period for all other assignment years presented.

The changes in forecasted collection rates for the three and nine months ended September 30, 2021 and 2020 impacted forecasted net cash flows (forecasted collections less forecasted Dealer Holdback payments) as follows:

(In millions) For the Three Months Ended September 30, For the Nine Months Ended September 30,

Increase (Decrease) in Forecasted Net Cash Flows 2021 2020 2021 2020

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Under the GAAP methodology that we employ (known as CECL), changes in the amount and timing of forecasted net cash flows are recorded as a provision for credit losses in the current period.

While the adjustment to our forecast, which we continued to apply through the second quarter of 2021, represents our best estimate at this time, the COVID-19 pandemic has created conditions that increase the level of uncertainty associated with our estimate of the amount and timing of future net cash flows from our Loan portfolio.

The following table summarizes changes in realized collections in each of the last six quarters as compared to the same period in the previous year:

Year over Year Percent Change

Three Months Ended Front End Collections (1) Total Collections

March 31, 2020 8.8 % 9.1 %

June 30, 2020 11.4 % 6.5 %

September 30, 2020 15.6 % 11.3 %

December 31, 2020 12.4 % 9.9 %

March 31, 2021 22.7 % 19.0 %

June 30, 2021 20.9 % 23.8 %

(1) Represents collections realized on Consumer Loans that are either current or in the early stages of delinquency.

Starting in mid-March 2020, we experienced a reduction in realized collections at the same time government authorities began to implement restrictions that limited economic activity.

The reduction in front end collections reflected a lower volume of payments from customers while the reduction in total collections also included lower realized collections from repossessions, which were temporarily suspended as the COVID-19 crisis began to unfold.

Starting in mid-April 2020, front end collections improved as federal stimulus and enhanced unemployment benefit payments were distributed.

Starting in August 2020 and continuing through the end of 2020, the improvement in front end collections declined as federal stimulus and enhanced unemployment benefit payments lapsed, and unemployment rates, while improved, remained above pre-pandemic levels.

For the quarter ended March 31, 2021, front end collections and total collections improved as additional federal stimulus payments were distributed.

For the quarter ended June 30, 2021, the improvement in front end collections stabilized while total collections improved as collections from repossessions increased.

Front end collections and total collections for the 28-day period ended July 28, 2021, increased 10.4% and 12.1%, respectively, compared to the same period in 2020.

We believe the improvement in collections declined in July from the second quarter of 2021 primarily as a result of the impact of federal stimulus and enhanced unemployment benefit payments on July 2020 results and a decline in growth rate of our Loan portfolio.

We have continued to apply this adjustment to our forecast through the third quarter of 2021 as it continues to represent our best estimate of the impact of the COVID-19 pandemic on future net cash flows.

The COVID-19 pandemic has created conditions that increase the level of uncertainty associated with our estimate of the amount and timing of future net cash flows from our Loan portfolio.

The following table presents information on the average Consumer Loan assignment for each of the last 10 years:

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Payments of Dealer Holdback and accelerated Dealer Holdback are not included.

(3) The averages for 2021 Consumer Loans include both Consumer Loans that were in our portfolio as of March 31, 2021 and Consumer Loans assigned during the most recent quarter.

(3) The averages for 2021 Consumer Loans include both Consumer Loans that were in our portfolio as of June 30, 2021 and Consumer Loans assigned during the most recent quarter.

The following table provides averages for each of these segments:

2021 Consumer Loan Assignment Period Consumer Loan Advance Initial Loan Term (in months)

January 1, 2021 through March 31, 2021 $ 24,601 $ 11,015 60

April 1, 2021 through June 30, 2021 25,039 11,485 59

January 1, 2021 through June 30, 2021 $ 24,788 $ 11,216 60

July 1, 2021 through September 30, 2021 26,938 12,527 59

The increase in the average Consumer Loan from the first six months of 2021 to the third quarter of 2021 was primarily the result of an increase in the average vehicle selling price.

Forecasting collection rates accurately at Loan inception is difficult.

With this in mind, we establish advance rates that are intended to allow us to achieve acceptable levels of profitability, even if collection rates are less than we initially forecast.

The following table presents forecasted Consumer Loan collection rates, advance rates, the spread (the forecasted collection rate less the advance rate), and the percentage of the forecasted collections that had been realized as of June 30, 2021.

All amounts, unless otherwise noted, are presented as a percentage of the initial balance of the Consumer Loan (principal + interest).

The table includes both Dealer Loans and Purchased Loans.

As of June 30, 2021

As of September 30, 2021

Consumer Loan Assignment Year Forecasted Collection % Advance % (1) Spread % % of Forecast Realized (2)

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(2) Presented as a percentage of total forecasted collections.

(3) The forecasted collection rate, advance rate and spread for 2021 Consumer Loans as of June 30, 2021 include both Consumer Loans that were in our portfolio as of March 31, 2021 and Consumer Loans assigned during the most recent quarter.

(3) The forecasted collection rate, advance rate and spread for 2021 Consumer Loans as of September 30, 2021 include both Consumer Loans that were in our portfolio as of June 30, 2021 and Consumer Loans assigned during the most recent quarter.

The following table provides forecasted collection rates, advance rates, and spreads for each of these segments:

As of June 30, 2021

As of September 30, 2021

2021 Consumer Loan Assignment Period Forecasted

Collection % Advance % Spread %

January 1, 2021 through March 31, 2021 65.3 % 44.8 % 20.5 %

April 1, 2021 through June 30, 2021 66.5 % 45.9 % 20.6 %

January 1, 2021 through June 30, 2021 66.4 % 45.2 % 21.2 %

July 1, 2021 through September 30, 2021 66.4 % 46.5 % 19.9 %

The risk of a material change in our forecasted collection rate declines as the Consumer Loans age.

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The spread between the forecasted collection rate and the advance rate has ranged from 19.8% to 27.5%, on an annual basis, over the last 10 years.

The spread was at the high end of this range in 2012, when the competitive environment was unusually favorable, and much lower during other years (2015 through 2021) when competition was more intense.

The decrease in the spread from 2020 to 2021 was primarily the result of the performance of 2020 Consumer Loans, which has exceeded our initial estimates by a greater margin than those assigned to us in 2021, partially offset by a higher initial spread on 2021 Consumer Loans, primarily due to a higher initial forecast on 2021 Consumer Loans.

The following table compares our forecast of Consumer Loan collection rates as of June 30, 2021 with the forecasts at the time of assignment, for Dealer Loans and Purchased Loans separately:

The spread was at the high end of this range in 2012, when the competitive environment was unusually favorable, and much lower during other years (2015 through 2019 and 2021) when competition was more intense.

Despite intense competition, the spread in 2020 was higher than other recent years due to Consumer Loan performance, which has exceeded our initial estimates by a significantly greater margin than the other years presented.

The decrease in the spread from 2020 to 2021 was primarily the result of the performance of 2020 Consumer Loans, partially offset by a higher initial spread on 2021 Consumer Loans, primarily due to a higher initial forecast on 2021 Consumer Loans.

The decrease in the spread from the first six months of 2021 to the third quarter of 2021 was primarily due to Consumer Loan performance.

The following table compares our forecast of Consumer Loan collection rates as of September 30, 2021 with the forecasts at the time of assignment, for Dealer Loans and Purchased Loans separately:

Dealer Loans Purchased Loans

Forecasted Collection Percentage as of (1) Forecasted Collection Percentage as of (1)

Consumer Loan Assignment Year June 30, 2021 Initial

Forecast Variance June 30, 2021 Initial

Consumer Loan Assignment Year September 30, 2021 Initial

Forecast Variance September 30, 2021 Initial

Forecast Variance

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The following table presents forecasted Consumer Loan collection rates, advance rates, and the spread (the forecasted collection rate less the advance rate) as of June 30, 2021 for Dealer Loans and Purchased Loans separately.

The following table presents forecasted Consumer Loan collection rates, advance rates, and the spread (the forecasted collection rate less the advance rate) as of September 30, 2021 for Dealer Loans and Purchased Loans separately.

All amounts are presented as a percentage of the initial balance of the Consumer Loan (principal + interest).

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Although the advance rate on Purchased Loans is higher as compared to the advance rate on Dealer Loans, Purchased Loans do not require us to pay Dealer Holdback.

The spread on Dealer Loans decreased from 23.6% in 2020 to 21.2% in 2021 primarily as a result of the performance of the 2020 Consumer Loans in our Dealer Loan portfolio, which has exceeded our initial estimates, partially offset by a higher initial spread on 2021 Consumer Loans in our Dealer Loan portfolio, primarily due to a higher initial forecast on 2021 Consumer Loans in our Dealer Loan portfolio.

The spread on Purchased Loans decreased from 22.0% in 2020 to 19.2% in 2021 primarily as a result of the performance of the 2020 Consumer Loans in our Purchased Loan portfolio, which has exceeded our initial estimates by a greater margin than those assigned to us in 2021, partially offset by a higher initial spread on 2021 Consumer Loans in our Purchased Loan portfolio, primarily due to a higher initial forecast on 2021 Consumer Loans in our Purchased Loan portfolio.

The spread on Dealer Loans decreased from 24.4% in 2020 to 21.5% in 2021 primarily as a result of the performance of the 2020 Consumer Loans in our Dealer Loan portfolio, which has exceeded our initial estimates by a greater margin than those assigned to us in 2021, partially offset by a higher initial spread on 2021 Consumer Loans in our Dealer Loan portfolio, primarily due to a higher initial forecast on 2021 Consumer Loans in our Dealer Loan portfolio.

The spread on Purchased Loans decreased from 22.7% in 2020 to 19.6% in 2021 primarily as a result of the performance of the 2020 Consumer Loans in our Purchased Loan portfolio, which has exceeded our initial estimates by a greater margin than those assigned to us in 2021,

partially offset by a higher initial spread on 2021 Consumer Loans in our Purchased Loan portfolio, primarily due to a higher initial forecast on 2021 Consumer Loans in our Purchased Loan portfolio.

Access to Capital

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and (3) maintain multiple funding sources.

Our funded debt to equity ratio was 2.0 to 1 as of June 30, 2021.

Our funded debt to equity ratio was 2.4 to 1 as of September 30, 2021.

We currently utilize the following primary forms of debt financing:

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Consumer Loan Volume

The following table summarizes changes in Consumer Loan assignment volume in each of the last ten quarters as compared to the same period in the previous year:

The following table summarizes changes in Consumer Loan assignment volume in each of the last eleven quarters as compared to the same period in the previous year:

Year over Year Percent Change

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June 30, 2021 -28.7 % -20.5 %

September 30, 2021 -29.4 % -17.9 %

(1) Represents advances paid to Dealers on Consumer Loans assigned under our Portfolio Program and one-time payments made to Dealers to purchase Consumer Loans assigned under our Purchase Program.

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Our pricing strategy is intended to maximize the amount of economic profit we generate, within the confines of capital and infrastructure constraints.

Unit and dollar volumes declined 28.7% and 20.5%, respectively, during the second quarter of 2021 as the number of active Dealers declined 10.8% and the average unit volume per active Dealer declined 20.0%.

Dollar volume declined less than unit volume during the second quarter of 2021 due to an increase in the average advance paid per unit.

Unit and dollar volumes declined 29.4% and 17.9%, respectively, during the third quarter of 2021 as the number of active Dealers declined 15.0% and the average unit volume per active Dealer declined 17.0%.

Dollar volume declined less than unit volume during the third quarter of 2021 due to an increase in the average advance paid per unit.

This increase was the result of an increase in the average size of the Consumer Loans assigned, primarily due to an increase in the average vehicle selling price.

The following table summarizes changes in Consumer Loan assignment unit volume in each of the last two quarters as compared to the same periods in 2019:

The following table summarizes changes in Consumer Loan assignment unit volume in each of the last three quarters as compared to the same periods in 2019:

Three Months Ended Percent Change in Unit Volume Compared to the Same Periods in 2019

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June 30, 2021 -24.6 %

September 30, 2021 -35.6 %

Starting in mid-March 2020, we experienced a significant decline in unit volume that we believe was primarily due to the impact of COVID-19, which resulted in many Dealers temporarily closing or restricting their operations and a deterioration in consumer demand for Dealers that remained open.

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Unit volumes improved again in March and April 2021 as additional federal stimulus payments were distributed.

Starting in May 2021 and continuing through July 2021, we experienced another significant decline in unit volume.

Unit volume for the 28-day period ended July 28, 2021, declined 37.6% and 33.2% compared to the same periods in 2020 and 2019, respectively.

Starting in May 2021 and continuing through October 2021, we experienced another significant decline in unit volume.

We believe that this decline is primarily due to low dealer inventories and elevated used vehicle prices, which we believe are primarily due to the downstream impact of supply chain disruptions in the automotive industry.

Unit volume for October 2021 declined 25.6% and 38.9% compared to unit volume for October 2020 and October 2019, respectively.

The following table summarizes the changes in Consumer Loan unit volume and active Dealers:

For the Three Months Ended June 30, For the Six Months Ended June 30,

For the Three Months Ended September 30, For the Nine Months Ended September 30,

2021 2020 % Change 2021 2020 % Change

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The following table provides additional information on the changes in Consumer Loan unit volume and active Dealers:

For the Three Months Ended June 30, For the Six Months Ended June 30,

For the Three Months Ended September 30, For the Nine Months Ended September 30,

2021 2020 % Change 2021 2020 % Change

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decrease in Consumer Loan unit volume from Dealers who have received funding for at least one Loan during the comparable period of the prior year but did not receive funding for any Loans during the current period divided by prior year comparable period Consumer Loan unit volume.

The following table shows the percentage of Consumer Loans assigned to us as Dealer Loans and Purchased Loans for each of the last six quarters:

The following table shows the percentage of Consumer Loans assigned to us as Dealer Loans and Purchased Loans for each of the last seven quarters:

Unit Volume Dollar Volume (1)

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June 30, 2021 66.9 % 33.1 % 64.0 % 36.0 %

September 30, 2021 69.9 % 30.1 % 66.8 % 33.2 %

(1) Represents advances paid to Dealers on Consumer Loans assigned under our Portfolio Program and one-time payments made to Dealers to purchase Consumer Loans assigned under our Purchase Program.

Payments of Dealer Holdback and accelerated Dealer Holdback are not included.

As of June 30, 2021 and December 31, 2020, the net Dealer Loans receivable balance was 61.1% and 61.4%, respectively, of the total net Loans receivable balance.

As of September 30, 2021 and December 31, 2020, the net Dealer Loans receivable balance was 61.2% and 61.4%, respectively, of the total net Loans receivable balance.

Results of Operations

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For additional information, see Note 3 and Note 6 to the consolidated financial statements contained in Part I - Item 1 of this Form 10-Q, which is incorporated herein by reference.

Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020

The following is a discussion of our results of operations and income statement data on a consolidated basis.

(Dollars in millions, except per share data) For the Three Months Ended

September 30,

2021 2020 $ Change % Change

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The increase of $37.7 million, or 9.3%, was primarily the result of an increase in the average yield on our Loan portfolio, as follows:

(Dollars in millions) For the Three Months Ended June 30,

(Dollars in millions) For the Three Months Ended September 30,

2021 2020 Change

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Average yield on our Loan portfolio 26.5 % 23.7 % 2.8 %

The following table summarizes the impact each component had on the overall increase in finance charges for the three months ended June 30, 2021:

The following table summarizes the impact each component had on the overall increase in finance charges for the three months ended September 30, 2021:

(In millions) Year over Year Change

Impact on finance charges:

For the Three Months Ended June 30, 2021

For the Three Months Ended September 30, 2021

Due to an increase in the average yield $ 45.7

Due to an increase in the average net Loans receivable balance 10.7

Due to a decrease in the average net Loans receivable balance (8.0)

Total increase in finance charges $ 37.7

The average yield on our Loan portfolio for the three months ended June 30, 2021 increased as compared to the same period in 2020 primarily due to the adoption of CECL on January 1, 2020, which requires us to recognize finance charges on new Consumer Loan assignments using effective interest rates based on contractual future net cash flows, which are significantly in excess of our expected yields.

The average yield on our Loan portfolio for the three months ended September 30, 2021 increased as compared to the same period in 2020 primarily due to the adoption of CECL on January 1, 2020, which requires us to recognize finance charges on new Consumer Loan assignments using effective interest rates based on contractual future net cash flows, which are significantly in excess of our expected yields.

Other Income .

The decrease of $3.4 million, or 24.5%, was primarily due to a decrease in ancillary product profit sharing income due to an increase in average vehicle service contract claim rates.

The increase of $5.6 million, or 80.0%, was primarily due to an increase in ancillary product profit sharing income due to a decrease in average vehicle service contract claim rates.

Operating Expenses.

The decrease of $11.4 million, or 14.0%, was primarily due to:

• A decrease in salaries and wages expense of $10.4 million, or 21.3%, primarily due to the forfeiture of unvested restricted stock and restricted stock units upon the retirement of our former Chief Executive Officer in May 2021, which resulted in an $11.5 million reversal of stock-based compensation expense.

• A decrease in sales and marketing expense of $3.3 million, or 18.1%, primarily due to a decrease in sales commissions related to a decline in Consumer Loan assignment volume and a decrease in the size of our sales force.

The increase of $16.0 million, or 19.9%, was due to an increase in salaries and wages expense of $16.6 million, or 35.6%, primarily due to a $14.7 million increase in stock-based compensation expense related to stock options.

From December 2020 through June 2021, we granted stock options, subject to shareholder approval of an amendment to our incentive compensation plan, that vest and become exercisable in four equal annual installments beginning on the first anniversary of the date on which the options were granted.

Stock compensation expense is normally recognized over the vesting period starting from the grant date.

However, since our grants were dependent upon shareholder approval, no stock compensation expense could be recognized until we received shareholder approval at the annual meeting in July 2021.

At that time, we began recognizing the fair value of the stock options as stock-based compensation expense over the remaining vesting period.

This resulted in the expense for the first annual vesting installment being recognized over a shorter time period as it is being recognized over the period from July 2021 through the first anniversary of the date on which the options were granted.

The expense for subsequent annual vesting installments will be recognized over their respective annual vesting periods.

For additional information, see Note 14 to the consolidated financial statements contained in Part I - Item 1 of this Form 10-Q, which is incorporated herein by reference.

Provision for Credit Losses .

The decrease of $169.9 million, or 121.9%, was due to decreases in provision for credit losses on forecast changes and provision for credit losses on new Consumer Loan assignments.

The increase of $21.5 million, or 72.1%, was due to a smaller reversal of provision for credit losses on forecast changes, partially offset by a decrease in provision for credit losses on new Consumer Loan assignments.

We recognize provision for credit losses on new Consumer Loan assignments for contractual net cash flows that are not expected to be realized at the time of assignment.

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The following table summarizes the provision for credit losses for each of these components:

(In millions) For the Three Months Ended June 30,

(In millions) For the Three Months Ended September 30,

Provision for Credit Losses 2021 2020 Change

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Total $ (8.3) $ (29.8) $ 21.5

The decrease in provision for credit losses related to new Consumer Loan assignments was due to a 28.7% decrease in Consumer Loan assignment volume and a decrease in the average provision for credit losses per Consumer Loan assignment primarily due to a higher initial forecast on 2021 Consumer Loan assignments.

The decrease in provision for credit losses related to forecast changes was primarily due to an improvement in Consumer Loan performance.

During the second quarters of 2021 and 2020, we increased our estimate of future net cash flows by $104.5 million and $24.4 million, respectively, to reflect improvements in Consumer Loan performance during the periods.

The decrease in provision for credit losses related to new Consumer Loan assignments was due to a 29.4% decrease in Consumer Loan assignment unit volume and a decrease in the average provision for credit losses per Consumer Loan assignment primarily due to a higher initial forecast on 2021 Consumer Loan assignments.

The smaller reversal of provision for credit losses related to forecast changes was primarily due to a smaller improvement in Consumer Loan performance.

During the third quarters of 2021 and 2020, we increased our estimate of future net cash flows by $82.3 million and $138.5 million, respectively, to reflect improvements in Consumer Loan performance during the periods.

The decrease of $7.0 million, or 15.0%, was primarily due to a decrease in our average cost of debt, as follows:

(Dollars in millions) For the Three Months Ended June 30,

(Dollars in millions) For the Three Months Ended September 30,

2021 2020 Change

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Provision for Income Taxes .

For the three months ended June 30, 2021, the effective income tax rate decreased to 24.0% from 24.6% for the three months ended June 30, 2020.

The decrease was primarily due to the impact of non-deductible expenses on our effective income tax rate, which decreased from 2020 to 2021 primarily due to an increase in pre-tax income.

For additional information, see Note 11 to the consolidated financial statements contained in Part I - Item 1 of this Form 10-Q, which is incorporated herein by reference.

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020

For the three months ended September 30, 2021, the effective income tax rate increased to 24.7% from 24.0% for the three months ended September 30, 2020.

The increase was due to an increase in non-deductible executive compensation expenses and higher effective tax rates in certain state tax jurisdictions.

For additional information, see Note 11 to the consolidated financial statements contained in Part I - Item 1 of this Form 10-Q, which i s incorporated herein by reference.

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

The following is a discussion of our results of operations and income statement data on a consolidated basis.

(Dollars in millions, except per share data) For the Six Months Ended

(Dollars in millions, except per share data) For the Nine Months Ended

September 30,

2021 2020 $ Change % Change

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The increase of $167.9 million, or 14.7%, was primarily the result of an increase in the average yield on our Loan portfolio, as follows:

(Dollars in millions) For the Six Months Ended June 30,

(Dollars in millions) For the Nine Months Ended September 30,

2021 2020 Change

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Average yield on our Loan portfolio 25.8 % 22.7 % 3.1 %

The following table summarizes the impact each component had on the overall increase in finance charges for the six months ended June 30, 2021:

The following table summarizes the impact each component had on the overall increase in finance charges for the nine months ended September 30, 2021:

(In millions) Year over Year Change

Impact on finance charges:

For the Six Months Ended June 30, 2021

For the Nine Months Ended September 30, 2021

Due to an increase in the average yield $ 159.7

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Total increase in finance charges $ 167.9

The average yield on our Loan portfolio for the six months ended June 30, 2021 increased as compared to the same period in 2020 primarily due to the adoption of CECL on January 1, 2020, which requires us to recognize finance charges on new Consumer Loan assignments using effective interest rates based on contractual future net cash flows, which are significantly in excess of our expected yields.

Other Income .

The decrease of $6.0 million, or 21.3%, was primarily due to a decrease in ancillary product profit sharing income due to an increase in average vehicle service contract claim rates and a decrease in interest income earned on restricted cash and cash equivalents primarily due to a decline in benchmark interest rates.

The average yield on our Loan portfolio for the nine months ended September 30, 2021 increased as compared to the same period in 2020 primarily due to the adoption of CECL on January 1, 2020, which requires us to recognize finance charges on new Consumer Loan assignments using effective interest rates based on contractual future net cash flows, which are significantly in excess of our expected yields.

Operating Expenses.

The increase of $38.1 million, or 15.8%, was primarily due to:

• An increase in general and administrative expense of $33.4 million, or 112.8%, primarily due to an increase in legal expenses, which included the recognition of a $27.2 million contingent loss during the first quarter of 2021 related to the Company and the Commonwealth of Massachusetts reaching an agreement in principle to settle pending litigation.

• A decrease in salaries and wages expense of $6.1 million, or 6.5%, primarily due to:

• The forfeiture of unvested restricted stock and restricted stock units upon the retirement of our former Chief Executive Officer in May 2021, which resulted in an $11.5 million reversal of stock-based compensation expense.

• An increase in general and administrative expense of $33.1 million, or 70.7%, primarily due to an increase in legal expenses, which included a $27.2 million settlement with the Commonwealth of Massachusetts to settle and fully resolve the claims asserted against the Company.

For additional information, see Note 15 to the consolidated financial statements contained in Part I - Item 1 of this Form 10-Q, which is incorporated herein by reference.

• An increase in salaries and wages expense of $10.5 million, or 7.5%, primarily due to:

• An increase of $13.8 million, excluding fringe benefits and cash-based incentive compensation expense, related to increases of $7.7 million for our support function, $4.4 million for our servicing function and $1.7 million for our originations function.

The increase in our support function was primarily related to a $7.0 million increase related to our information technology department.

• An increase of $4.0 million in fringe benefits primarily due to higher medical claims.

• A decrease of $7.3 million in cash-based incentive compensation expense, primarily due to a change in the incentive compensation program for senior management, which eliminated annual cash awards in favor of longer-term equity awards, partially offset by an increase in profit sharing primarily due to an improvement in Company performance measures.

• An increase of $5.5 million primarily related to our information technology department.

• A decrease in sales and marketing expense of $5.2 million, or 13.9%, primarily due to a decrease in sales commissions related to a decline in Consumer Loan assignment volume and a decrease in the size of our sales force.

Provision for Credit Losses .

Th e decrease of $503.3 million, or 101.9%, was primarily due to decreases in provision for credit losses on forecast changes and provision for credit losses on new Consumer Loan assignments.

The decrease of $481.8 million, or 103.8%, was due to decreases in provision for credit losses on forecast changes and provision for credit losses on new Consumer Loan assignments.

We recognize provision for credit losses on new Consumer Loan assignments for contractual net cash flows that are not expected to be realized at the time of assignment.

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The following table summarizes the provision for credit losses for each of these components:

(In millions) For the Six Months Ended June 30,

(In millions) For the Nine Months Ended September 30,

Provision for Credit Losses 2021 2020 Change

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Total $ (17.5) $ 464.3 $ (481.8)

The decrease in provision for credit losses related to new Consumer Loan assignments was due to a 17.9% decrease in Consumer Loan assignment volume and a decrease in the average provision for credit losses per Consumer Loan assignment primarily due to a higher initial forecast on 2021 Consumer Loan assignments.

The decrease in provision for credit losses related to new Consumer Loan assignments was due to a 21.1% decrease in Consumer Loan assignment unit volume and a decrease in the average provision for credit losses per Consumer Loan assignment primarily due to a higher initial forecast on 2021 Consumer Loan assignments.

The decrease in provision for credit losses related to forecast changes was primarily due to an improvement in Consumer Loan performance.

During the first six months of 2021, we increased our estimate of future net cash flows by $211.9 million to reflect an improvement in Consumer Loan performance during the period.

During the first six months of 2020, we reduced our estimate of future net cash flows from our Loan portfolio by $182.1 million primarily to reflect the estimated long-term impact of COVID-19 on Consumer Loan performance.

For additional information, see Note 3 and Note 6 to the consolidated financial statements contained in Part I - Item 1 of this Form 10-Q, which is incorporated herein by reference.

During the first nine months of 2021, we increased our estimate of future net cash flows by $294.2 million to reflect an improvement in Consumer Loan performance during the period.

During the first nine months of 2020, we reduced our estimate of future net cash flows from our Loan portfolio by $43.6 million to reflect the estimated long-term impact of COVID-19 on Consumer Loan performance.

For additional information, see Note 6 to the consolidated financial statements contained in Part I - Item 1 of this Form 10-Q, which is incorporated herein by reference.

The decrease of $21.3 million, or 14.5%, was primarily due to a decrease in our average cost of debt, as follows:

(Dollars in millions) For the Six Months Ended June 30,

(Dollars in millions) For the Nine Months Ended September 30,

2021 2020 Change

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Loss on Extinguishment of Debt.

For the six months ended June 30, 2020, we recognized a loss on extinguishment of debt of $7.4 million related to the redemption of the 2023 senior notes in March 2020.

For the nine months ended September 30, 2020, we recognized a loss on extinguishment of debt of $7.4 million related to the redemption of the 2023 senior notes in March 2020.

Provision for Income Taxes.

For the six months ended June 30, 2021, our effective income tax rate increased to 23.8% from 16.0% for the six months ended June 30, 2020.

For the nine months ended September 30, 2021, our effective income tax rate increased to 24.1% from 23.6% for the nine months ended September 30, 2020.

The increase was primarily due to the impact of tax benefits related to our stock-based compensation plan and non-deductible expenses on our effective income tax rate, which decreased from 2020 to 2021 primarily due to an increase in pre-tax income.

For additional information, see Note 11 to the consolidated financial statements contained in Part I - Item 1 of this Form 10-Q, which is incorporated herein by reference.

For additional information, see Note 11 to the consolidated financial statements contained in Part I - Item 1 of this Form 10-Q, which i s incorporated herein by reference.

Liquidity and Capital Resources

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and (4) senior notes.

There are various restrictive covenants to which we are subject under each financing arrangement and we were in compliance with those covenants as of June 30, 2021.

There are various restrictive covenants to which we are subject under each financing arrangement and we were in compliance with those covenants as of September 30, 2021.

For information regarding these financings and the covenants included in the related documents, see Note 9 to the consolidated financial statements contained in Part I - Item 1 of this Form 10-Q, which is incorporated herein by reference.

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The financing has an expected annualized cost of approximately 1.5% (including the initial purchasers’ fees and other costs), and it will revolve for 24 months, after which it will amortize based upon the cash flows on the contributed Loans.

Cash and cash equivalents as of June 30, 2021 and December 31, 2020 was $383.5 million and $16.0 million, respectively.

The increase in cash and cash equivalents was primarily the result of cash generated from the completion of secured financings during 2021.

As of June 30, 2021 and December 31, 2020, we had $1,590.0 million and $1,419.1 million, respectively, in unused and available lines of credit.

Our total balance sheet indebtedness increased $171.5 million to $4,780.1 million as of June 30, 2021 from $4,608.6 million as of December 31, 2020, primarily due to stock repurchases.

On September 1, 2021, we extended the date on which our $200.0 million Warehouse Facility VIII will cease to revolve from July 26, 2022 to September 1, 2024.

On October 6, 2021, we increased the financing amount on our revolving secured line of credit facility with a commercial bank syndicate from $340.0 million to $385.0 million.

We also extended the maturity of the facility from June 22, 2023 to June 22, 2024.

The amount of the facility will decrease from $385.0 million to $350.0 million on June 22, 2022, and will further decrease from $350.0 million to $325.0 million on June 22, 2023.

On October 15, 2021, we extended the date on which our $75.0 million Warehouse Facility VI will cease to revolve from September 30, 2022 to September 30, 2024.

On October 28, 2021, we completed a $250.1 million Term ABS financing, which was used to repay outstanding indebtedness and for general corporate purposes.

The financing has an expected annualized cost of approximately 1.8% (including the initial purchasers’ fees and other costs), and it will revolve for 24 months, after which it will amortize based upon the cash flows on the contributed Loans.

Cash and cash equivalents as of September 30, 2021 and December 31, 2020 was $13.3 million and $16.0 million, respectively.

As of September 30, 2021 and December 31, 2020, we had $1,517.8 million and $1,419.1 million, respectively, in unused and available lines of credit.

Our total balance sheet indebtedness as of September 30, 2021 and December 31, 2020 was $4,607.1 million and $4,608.6 million, respectively.

Contractual Obligations

A summary of our scheduled principal debt maturities as of June 30, 2021 is as follows:

A summary of our scheduled principal debt maturities as of September 30, 2021 is as follows:

(In millions)

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis