What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-11 compared with 2021-02-12 · 106 added, 124 removed, 366 unchanged (39% 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 year ended December 31, 2020, consolidated net income was $421.0 million, or $23.47 per diluted share, compared to $656.1 million, or $34.57 per diluted share, for the same period in 2019 and $574.0 million, or $29.39 per diluted share, for the same period in 2018.

The decrease in 2020 consolidated net income was primarily due to an increase in our provision for credit losses primarily due to our adoption of CECL on January 1, 2020.

The growth in 2019 consolidated net income was primarily due to an increase in the average balance of our Loan portfolio.

COVID-19 continues to be widespread in the United States.

In an effort to contain the virus, authorities have implemented various measures, including travel bans, stay-at-home orders and shutdowns of non-essential businesses.

These measures have caused a significant decline in economic activity and a dramatic increase in unemployment.

While the prevalence, severity and impact of such restrictions have lessened and unemployment rates have improved, uncertainty remains as to when economic conditions will return to normalcy and whether further restrictions may be required.

Starting in mid-March, 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, after which collections and new loan volumes improved significantly.

Starting in late July and continuing through the end of the year, we experienced another substantial reduction in demand for our product.

As the virus is not yet fully contained, the ultimate impact of the pandemic on our business is not yet known.

The impact will depend on future developments, including, but not limited to, the duration of the pandemic, its severity, the actions to contain the disease or mitigate its impact, additional federal stimulus measures and enhanced unemployment benefits, if any, and the duration, timing and severity of the impact on consumer behavior and economic activity.

Results for the year ended December 31, 2020 include a provision for credit losses of $556.9 million reflecting the adoption of CECL on January 1, 2020 and the impact of changes in the amount and timing of forecasted future net cash flows from our Loan portfolio.

Under CECL, we are required to record a provision for credit losses for every new loan at the time that loan is originated equal to the difference between the amount we paid to acquire the loan and the present value of forecasted net cash flows using an effective interest rate prescribed under CECL.

The effective interest rate under CECL is calculated assuming 100% of the contractually scheduled payments of each loan is received.

Since we do not expect to receive this amount, the effective rate under CECL is higher than the rate we expect to earn.

Using the higher effective rate prescribed by CECL to record the loan results in a value for each loan that is less than the amount we paid to acquire the loan.

This difference is recorded as an allowance for credit losses along with a corresponding provision for credit losses.

For the year ended December 31, 2020, we recorded provision for credit losses of $518.6 million, related to new Consumer Loan assignments.

Over the life of the loan, we expect to record an amount equivalent to this provision for credit losses as finance charge revenue, which will be recognized using the same effective interest rate used to record the loan.

The remaining provision for credit losses of $38.3 million for the year ended December 31, 2020, reflected changes in our estimates of the amount and timing of future net cash flows from our Loan portfolio discussed below.

Under CECL, the net present value of the change in our net cash flow forecast is recorded as a provision for credit losses or reversal of provision for credit losses.

For the year ended December 31, 2021, consolidated net income was $958.3 million, or $59.52 per diluted share, compared to $421.0 million, or $23.47 per diluted share, for the same period in 2020.

The increase in consolidated net income was 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 the current expected credit loss (“CECL”) accounting standard on January 1, 2020.

Our results for the year ended December 31, 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 $326.1 million.

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

• A decline in Consumer Loan assignment volume, as unit and dollar volumes declined 21.4% and 13.0%, respectively, as compared to 2020.

• Stock repurchases of approximately 2.9 million shares, which represented 16.8% of the shares outstanding at the beginning of the year.

For the year ended December 31, 2020, consolidated net income was $421.0 million, or $23.47 per diluted share, compared to $656.1 million, or $34.57 per diluted share, for the same period in 2019.

The decrease in consolidated net income was primarily due to an increase in provision for credit losses primarily due to the adoption of CECL on January 1, 2020.

Our results for the year ended December 31, 2020 included:

• A decrease in forecasted collection rates for Consumer Loans assigned in 2015 through 2019 and an increase in forecasted collection rates for Consumer Loans assigned in 2020, which decreased forecasted net cash flows from our loan portfolio by $46.3 million.

• Forecasted profitability per Consumer Loan assignment that exceeded our initial estimate for Consumer Loans assigned in 2018 and 2019 and significantly exceeded our initial estimates for Consumer Loans assigned in 2020.

• A decline in Consumer Loan assignment volume, as unit and dollar volumes declined 7.5% and 3.5%, respectively, as compared to 2019.

• Stock repurchases of approximately 1.3 million shares, which represented 6.9% of the shares outstanding at the beginning of the year.

Critical Success Factors

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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.

Consumer Loans assigned in 2011 through 2013 and 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.

Consumer Loans assigned in 2012 and 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 year ended December 31, 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 year ended December 31, 2020, forecasted collection rates improved for Consumer Loans assigned in 2020, declined for Consumer Loans assigned in 2015 through 2019 and were generally consistent with expectations at the start of the period for all other assignment years presented.

For the year ended December 31, 2019, forecasted collection rates improved for Consumer Loans assigned in 2019, declined for Consumer Loans assigned in 2017 and were generally consistent with expectations at the start of the period for all other assignment years presented.

The changes in forecasted collection rates impacted forecasted net cash flows (forecasted collections less forecasted Dealer Holdback payments) as follows:

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Purchased Loans 238.4 (5.2) 22.5

$ (46.3) $ 14.6 $ 42.3

Total $ 326.1 $ (46.3) $ 14.6

During the first quarter of 2020, we reduced our estimate of future net cash flows from our Loan portfolio by $206.5 million, or 2.3% of the forecasted net cash flows at the start of the period, primarily due to the impact of the COVID-19 pandemic.

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Under 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 end of 2020, 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 four 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 %

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

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

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

Front end collections and total collections for the month ended January 31, 2021 increased 17.0% and 15.7%, respectively, as compared to the same period in 2020, as additional federal stimulus payments were distributed.

We have continued to apply this adjustment to our forecast through the end 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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The spread between the forecasted collection rate and the advance rate has ranged from 19.8% to 27.5% over the last 10 years.

The spread was at the high end of this range in 2011, when the competitive environment was unusually favorable, and much lower during other years (2015 through 2020) when competition was more intense.

The increase in the spread from 2019 to 2020 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 2019, partially offset by a lower initial forecast on 2020 Consumer Loans.

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 following table compares our forecast of Consumer Loan collection rates as of December 31, 2021 with the forecasts at the time of assignment, for Dealer Loans and Purchased Loans separately:

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(1) The forecasted collection rates presented for Dealer Loans and Purchased Loans reflect the Consumer Loan classification at the time of assignment.

The forecasted collection rates represent the total forecasted collections we expect to collect on the Consumer Loans as a percentage of the repayments that we were contractually owed on the Consumer Loans at the time of assignment.

Contractual repayments include both principal and interest.

The following table presents forecasted Consumer Loan collection rates, advance rates, and the spread (the forecasted collection rate less the advance rate) as of December 31, 2021 for Dealer Loans and Purchased Loans separately.

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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 increased from 21.0% in 2019 to 21.5% in 2020 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 2019, partially offset by a lower initial forecast on 2020 Consumer Loans in our Dealer Loan portfolio.

The spread on Purchased Loans increased from 19.5% in 2019 to 19.9% in 2020 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 2019, partially offset by a lower initial forecast on 2020 Consumer Loans in our Purchased Loan portfolio.

The spread on Dealer Loans decreased from 24.6% in 2020 to 21.1% in 2021 primarily as a result of the performance of the 2020 Consumer Loans in our Dealer Loan portfolio, which has significantly 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 22.9% in 2020 to 19.4% 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 significantly 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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During 2021, unit and dollar volumes decreased 21.4% and 13.0%, respectively, as the number of active Dealers declined 10.1% while average volume per active Dealer decreased 12.3%.

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.

Dollar volume declined less than unit volume during 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.

During 2020, unit and dollar volumes decreased 7.5% and 3.5%, respectively, as the number of active Dealers declined 5.3% while average volume per active Dealer decreased 2.5%.

Dollar volume declined less than unit volume during 2020 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 increases in the average vehicle selling price and average initial loan term and an increase in Purchased Loans as a percentage of total unit volume.

During 2019, unit volume decreased 0.9% while dollar volume grew 4.9%, as the number of active Dealers grew 7.0% while average volume per active Dealer decreased 7.4%.

Dollar volume grew while unit volume declined during 2019 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 and an increase in Purchased Loans as a percentage of total unit volume.

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

Year over Year Percent Change

Three Months Ended Unit Volume

March 31, 2020 -10.1 %

June 30, 2020 5.7 %

September 30, 2020 -8.8 %

December 31, 2020 -18.1 %

Starting in mid-March, 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.

During the latter part of April and continuing into July, unit volumes improved.

We believe the improvement resulted from a combination of Dealers gradually reopening their operations and the distribution of federal stimulus and enhanced unemployment benefit payments.

Starting in late July and continuing through the end of the year, we experienced another significant decline in unit volume as federal stimulus and enhanced unemployment benefit payments lapsed, Dealer inventories declined and used vehicle prices increased.

Unit volume for the month ended January 31, 2021 declined 6.1% as compared to the same period in 2020, as additional federal stimulus payments were distributed.

January 2021 was negatively impacted as it had one less business day as compared to the same period in 2020 (25 business days in January 2021 compared to 26 business days in January 2020) .

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

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The following is a discussion of our 2021 and 2020 results of operations and income statement data on a consolidated basis, including year-to-year comparisons between 2021 and 2020.

Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 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 Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

The Financial Accounting Standards Board issued a new accounting standard (known as CECL) that changed how we account for our Loans effective January 1, 2020.

Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 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 year ended December 31, 2020.

The net Loan income (finance charge revenue less provision for credit losses expense) that we recognize over the life of a Loan equals the cash we collect from the underlying Consumer Loan less the cash we pay to the Dealer.

While the total amount of net Loan income we will recognize over the life of the Loan is not impacted by CECL, the timing of when we will recognize this income has changed significantly from our prior accounting method.

We believe that recognizing net Loan income on a level-yield basis over the life of the Loan based on expected future net cash flows matches the economics of our business.

We believe CECL diverges from economic reality by requiring us to recognize a significant provision for credit losses expense at the time of assignment for amounts we never expected to realize and finance charge revenue in subsequent periods that is significantly in excess of our expected yields.

Given the significant change in timing of net Loan income recognition, net income for the year ending December 31, 2020 was significantly lower under CECL than what would have been reported under our prior accounting method, with the greatest impact occurring in the quarter of adoption.

The financial statement impact of CECL in any period will depend on Consumer Loan assignment volume and the percentage of Consumer Loans assigned to us as Purchased Loans, the size and composition of our Loan portfolio, the Loan portfolio’s credit quality and economic conditions.

We believe the economics of our business are best exhibited by recognizing net Loan income on a level-yield basis over the life of the Loan based on expected future net cash flows.

We do not believe the CECL methodology we employ under GAAP provides sufficient transparency into the economics of our business due to its asymmetry requiring us to recognize a significant provision for credit losses expense at the time of assignment for contractual net cash flows we never expect to realize and to recognize in subsequent periods finance charge revenue that is significantly in excess of our expected yields.

For additional information, see Note 2 and Note 5 to the consolidated financial statements contained in Item 8 of this Form 10-K, which is incorporated herein by reference.

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Finance Charges.

The increase of $193.0 million, or 14.1%, was primarily the result of increases in the average net Loans and the average yield on our Loan portfolio, as follows:

The increase of $180.2 million, or 11.5%, was primarily the result of an increase in the average yield on our Loan portfolio, as follows:

(Dollars in millions) For the Years Ended December 31,

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For the Year Ended December 31, 2021

Due to an increase in the average net Loans receivable balance $ 93.7

Due to an increase in the average yield $ 193.8

Due to a decrease in the average net Loans receivable balance (13.6)

Total increase in finance charges $ 180.2

The increase in the average net Loans receivable balance was primarily due to the dollar volume of new Consumer Loan assignments exceeding the principal collected on Loans receivable.

The average yield on year ended December 31, 2020 increased as compared to the same period in 2019 primarily due to our 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 $19.0 million, or 27.7%, was primarily due to a decrease in interest income earned on restricted cash and cash equivalents primarily due to a decline in benchmark interest rates, a decrease in remarketing fees due to a decrease in involuntary repossessions due to COVID-19 and a decrease in ancillary product profit sharing income due to an increase in average vehicle service contract claim rates.

The average yield on our Loan portfolio for the year ended December 31, 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 $58.1 million, or 17.8%, was primarily due to:

• An increase in salaries and wages expense of $31.6 million, or 16.9%, comprised of the following:

• An increase in stock-based compensation expense of $18.6 million, due to an increase of $33.7 million related to stock options and a decrease of $15.1 million related to restricted stock and restricted stock units.

We recognized $33.7 million of expense in 2021 for stock options granted from December 2020 through August 2021 primarily due to a change in the incentive compensation program for senior management.

During the second quarter of 2021, we recognized an $11.5 million reversal of stock-based compensation expense due to the forfeiture of unvested restricted stock and restricted stock units upon the retirement of our former Chief Executive Officer in May 2021.

For additional information, see Note 14 to the consolidated financial statements contained in Item 8 of this Form 10-K, which is incorporated herein by reference.

• An increase of $22.3 million, excluding stock-based compensation and cash-based incentive compensation, related to increases of $12.8 million for our support function, $9.0 million for our servicing function and $0.5 million for our originations function.

The increase in our support function was primarily related to a $7.4 million increase related to our information technology department.

• A decrease of $9.3 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 in general and administrative expense of $30.7 million, or 44.1%, 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 16 to the consolidated financial statements contained in Item 8 of this Form 10-K, which is incorporated herein by reference.

Provision for Credit Losses .

The increase of $480.5 million, or 628.9%, was primarily due to the impact of our adoption of CECL on January 1, 2020.

Under CECL, we are required to recognize provision for credit losses on new Consumer Loan assignments for contractual net cash flows that were not expected to be realized at the time of assignment.

Under both CECL and our prior accounting method, we also recognize provision for credit losses for forecast changes in the amount and timing of expected future net cash flows subsequent to assignment.

The decrease of $548.5 million, or 98.5%, 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.

We also recognize provision for credit losses on forecast changes in the amount and timing of expected future net cash flows subsequent to assignment.

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

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Total $ 8.4 $ 556.9 $ (548.5)

The decrease in provision for credit losses on forecast changes of $38.1 million was due to forecast changes in the amount and timing of expected future net cash flows and the adoption of CECL on January 1, 2020, which changed how these forecast changes are recognized.

For additional information, see Note 2 and Note 5 to the consolidated financial statements contained in Item 1 of this Form 10-K, which is incorporated herein by reference.

The decrease in provision for credit losses related to new Consumer Loan assignments was due to a 21.4% 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 decrease in provision for credit losses related to forecast changes was primarily due to an improvement in Consumer Loan performance.

For the year ended December 31, 2021, we increased our estimate of future net cash flows by $326.1 million to reflect improvements in Consumer Loan performance during the period.

For the year ended December 31, 2020, we decreased our estimate of future net cash flows by $46.3 million to reflect the estimated long-term impact of COVID-19 on Consumer Loan performance.

The decrease of $27.8 million, or 14.5%, was primarily due to a decrease in our average cost of debt, as follows:

(Dollars in millions) For the Years Ended December 31,

2021 2020 Change

Interest expense

$ 164.2 $ 192.0 $ (27.8)

Average outstanding debt principal balance (1)

4,728.9 4,712.8 16.1

Average cost of debt

3.5 % 4.1 % -0.6 %

(1) Includes the unamortized debt discount and excludes deferred debt issuance costs.

The decrease in our average cost of debt was primarily the result of lower interest rates on recently-completed secured financings.

Provision for Income Taxes.

For the year ended December 31, 2020, the effective income tax rate of 23.4% was generally consistent with the effective income tax rate of 23.3% for the year ended December 31, 2019.

For the year ended December 31, 2021, the effective income tax rate increased to 24.0% from 23.4% for the year ended December 31, 2020.

The increase was primarily due to an increase in our state income tax rate and the impact of tax benefits related to our stock-based compensation plan on our effective income tax rate.

The increase in our state income tax rate was primarily the result of the settlement of an uncertain tax position for state income taxes during 2020.

The impact of tax benefits related to our stock-based compensation plan, which reduce our effective income tax rate, 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 Item 8 of this Form 10-K, which is incorporated herein by reference.

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We calculate finance charges on a monthly basis by applying the effective interest rate of the Loan to the net carrying amount of the Loan (Loan receivable less the related allowance for credit losses).

For Consumer Loans assigned subsequent to December 31, 2019, the effective interest rate is based on contractual future net cash flows.

For Consumer Loans assigned on or subsequent to January 1, 2020, the effective interest rate is based on contractual future net cash flows.

For Consumer Loans assigned prior to January 1, 2020, the effective interest rate was determined based on expected future net cash flows.

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We periodically adjust our statistical pricing model for new trends that we identify through our evaluation of these forecasted collection rate variances.

COVID-19 continues to be widespread in the United States.

In an effort to contain the virus, authorities have implemented various measures, including travel bans, stay-at-home orders and shutdowns of non-essential businesses.

These measures have caused a significant decline in economic activity and a dramatic increase in unemployment.

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

Starting in late July and continuing through the end of the year, we experienced another substantial reduction in demand for our product.

As the virus is not yet fully contained, the ultimate impact of the pandemic on our business is not yet known.

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Under CECL, changes in the amount and timing of forecasted net cash flows are recorded as a provision for credit losses in the current period.

We have continued to apply this adjustment to our forecast through the end 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.

Our provision for credit losses for the year ended December 31, 2021, included:

• $518.6 million provision for credit losses on new Consumer Loan assignments related to our adoption of CECL on January 1, 2020, which reduced consolidated net income by $399.3 million, or $22.26 per diluted share;

• $365.1 million provision for credit losses on new Consumer Loan assignments, which reduced consolidated net income by $281.1 million, or $17.46 per diluted share;

• $356.7 million reversal of provision for credit losses on forecast changes related to changes in the amount and timing of expected future net cash flows, which increased consolidated net income by $274.7 million, or $17.06 per diluted share.

Our provision for credit losses for the year ended December 31, 2020, included:

• $518.6 million provision for credit losses on new Consumer Loan assignments related to the adoption of CECL on January 1, 2020, which reduced consolidated net income by $399.3 million, or $22.26 per diluted share;

• $38.3 million provision for credit losses on forecast changes related to changes in the amount and timing of expected future net cash flows, which reduced consolidated net income by $29.5 million, or $1.64 per diluted share.

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Significant increases in the inventory of used automobiles during periods of economic recession may also depress the prices at which repossessed automobiles may be sold or delay the timing of these sales.

Additionally, higher gasoline prices, declining stock market values, unstable real estate values, resets of adjustable rate mortgages to higher interest rates, increasing unemployment levels, general availability of consumer credit or other factors that impact consumer confidence or disposable income could increase loss frequency and decrease consumer demand for automobiles as well as weaken collateral values of automobiles.

Additionally, higher gasoline prices, increased focus on climate-related initiatives and regulation, declining stock market values, unstable real estate values, resets of adjustable rate mortgages to higher interest rates, increasing unemployment levels, general availability of consumer credit or other factors that impact consumer confidence or disposable income could increase loss frequency and decrease consumer demand for automobiles as well as weaken collateral values of automobiles.

Because our business is focused on consumers who do not qualify for conventional automobile financing, the actual rates of delinquencies, defaults, repossessions and losses on our Consumer Loans could be higher than those experienced in the general automobile finance industry, and could be more dramatically affected by a general economic downturn.

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For information regarding these financings and the covenants included in the related documents, see Note 9 to the consolidated financial statements contained in Item 8 of this Form 10-K, which is incorporated herein by reference.

On January 17, 2020, we used a portion of the net proceeds from the 2024 senior notes to redeem the remaining $151.8 million outstanding principal amount of the 2021 senior notes.

On February 20, 2020, we completed a $500.0 million Term ABS financing, which was used to repay outstanding indebtedness.

The financing has an expected annualized cost of approximately 2.5% (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.

On March 15, 2020, we redeemed the $250.0 million outstanding principal amount of the 2023 senior notes in accordance with the terms of the indenture governing the 2023 notes at a redemption price equal to 101.844% of the principal amount thereof.

On June 25, 2020, June 26, 2020, and June 30, 2020, we amended our agreements for Warehouse Facility II, Warehouse Facility VII, and our revolving secured line of credit facility, respectively.

The purpose of each of the three amendments was to modify the basis for calculating our compliance with the minimum net income and fixed charge coverage covenants for periods ending on or prior to December 31, 2020 from our current method of accounting to the basis of accounting that was used prior to January 1, 2020.

On July 23, 2020, we completed a $481.8 million Term ABS financing, which was used to repay outstanding indebtedness.

The financing has an expected annualized cost of approximately 2.0% (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.

On October 22, 2020, we completed a $600.0 million Term ABS financing, which was used to repay outstanding indebtedness.

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.

On December 15, 2020, we extended the maturity of our revolving secured line of credit facility with a commercial bank syndicate from June 22, 2022 to June 22, 2023.

The amount of the facility will remain at $340.0 million until June 22, 2022, when the amount of the facility will decrease to $305.0 million.

On December 16, 2020, we increased the financing amount on Warehouse Facility V from $100.0 million to $125.0 million and extended the date on which the facility will cease to revolve from August 17, 2021 to December 18, 2023.

The maturity of the facility was also extended from August 17, 2023 to December 16, 2025.

The interest rate on borrowings under the facility has been increased from LIBOR plus 190 basis points to LIBOR plus 225 basis points.

On January 29, 2021, we completed a $100.0 million Term ABS financing, which was used to repay outstanding indebtedness.

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On February 3, 2021, we extended the date on which our $400.0 million Warehouse Facility II will cease to revolve from July 12, 2022 to April 30, 2024.

Cash and cash equivalents decreased to $16.0 million as of December 31, 2020 from $187.4 million as of December 31, 2019.

On February 18, 2021, we completed a $500.0 million Term ABS financing, which was used to repay outstanding indebtedness.

The financing has an expected annualized cost of approximately 1.4% (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.

On May 20, 2021, we completed a $450.0 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 1.5% (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.

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 by $35.0 million on June 22, 2022, and will further decrease by $25.0 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.

On November 30, 2021, we increased the financing amount on our revolving secured line of credit facility with a commercial bank syndicate from $385.0 million to $435.0 million.

As noted above, the amount of the facility will decrease by $35.0 million on June 22, 2022, and will further decrease by $25.0 million on June 22, 2023.

Cash and cash equivalents increased to $23.3 million as of December 31, 2021 from $16.0 million as of December 31, 2020.

As of December 31, 2021 and December 31, 2020 we had $1,532.4 million and $1,419.1 million, respectively, in unused and available lines of credit.

Our total balance sheet indebtedness increased to $4,608.6 million as of December 31, 2020 from $4,538.8 million as of December 31, 2019, primarily due to the growth in new Consumer Loan assignments and stock repurchases.

Contractual Obligations

A summary of the total future contractual obligations requiring repayments as of December 31, 2020 is as follows:

(In millions) Payments Due by Period

Total Less than

1 Year 1-3 Years 3-5 Years More than

5 Years Other

Our total balance sheet indebtedness increased to $4,616.3 million as of December 31, 2021 from $4,608.6 million as of December 31, 2020.

A summary of the future material financial obligations requiring repayments as of December 31, 2021 is as follows:

(In millions) Payments Due as of December 31, 2021

12 months In 12 months

or more Total

Long-term debt, including current maturities (1) $ 1,431.2 $ 3,211.5 $ 4,642.7

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Purchase obligations (4) 3.1 10.8 13.9

Other future obligations (5) 41.8 — — — — 41.8

Total contractual obligations $ 5,506.3 $ 1,238.2 $ 2,912.4 $ 708.8 $ 605.1 $ 41.8

Total financial obligations $ 1,623.7 $ 4,060.3 $ 5,684.0

(1) The amounts presented consist solely of principal and do not reflect deferred debt issuance costs of $26.4 million.

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The amounts presented represent our forecast as of December 31, 2021.

(3) A lease lia bility of $1.5 m illion is recognized within accounts payable and accrued liabilities in our consolidated balance sheets.

(3) A lease lia bi lity of $0.5 million is recognized within accounts payable and accrued liabilities in our consolidated balance sheets.

(4) Purchase obligations consist primarily of contractual obligations related to our information system and facility needs.

(5) The amounts presented consist solely of reserves for uncertain tax positions.

Payments are contingent upon examination and would occur in the periods in which the uncertain tax positions are settled.

Based upon anticipated cash flows, management believes that cash flows from operations and our various financing alternatives will provide sufficient financing for debt maturities and for future operations.

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For every 100-basis-point increase in interest rates on our revolving secured line of credit, annual after-tax earnings would decrease by approximately $0.0 million, assuming we maintain a level amount of floating rate debt.

As of December 31, 2020, we had $75.0 million in floating rate debt outstanding under Warehouse Facility II covered by an interest rate cap with a cap rate of 5.50% on the underlying benchmark rate.

Based on the difference between the underlying benchmark rate on Warehouse Facility II as of December 31, 2020 and the interest rate cap rate, the interest rate on Warehouse Facility II could increase by a maximum of 5.35%.

This maximum interest rate increase would reduce annual after-tax earnings by approximately $3.1 million, assuming we maintain a level amount of floating rate debt.

As of December 31, 2020, we had interest rate cap agreements outstanding to manage the interest rate risk on Warehouse Facility IV, Warehouse Facility V, Warehouse Facility VII and Warehouse Facility VIII.

As of December 31, 2021, we had interest rate cap agreements outstanding to manage the interest rate risk on Warehouse Facility II, Warehouse Facility IV, Warehouse Facility V and Warehouse Facility VIII.

However, as of December 31, 2021, there was no floating rate debt outstanding under these facilities.

As of December 31, 2021, we did not have a balance outstanding under Warehouse Facility VI, which does not have interest rate protection.

As of December 31, 2021, we had $100.0 million in floating rate debt outstanding under Term ABS 2021-1, which was covered by an interest rate cap with a cap rate of 5.50% on the underlying benchmark rate.

For every 100-basis-point increase in interest rates on Term ABS 2021-1 up to the cap rate of 5.50%, annual after-tax earnings would decrease by approximately $0.8 million, assuming we maintain a level amount of floating rate debt.

New Accounting Updates

See Note 2 to the consolidated financial statements contained in Item 8 of this Form 10-K, which is incorporated herein by reference, for information concerning the following new accounting updates and the impact of the implementation of these updates on our financial statements:

• Accounting for Costs of Implementing Cloud Computing.

• Measurement of Credit Losses on Financial Instruments.

• Simplifying the Accounting for Income Taxes.

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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-K

Item 7. Management’s Discussion and Analysis