What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-05-02 compared with 2021-11-01 · 100 added, 225 removed, 291 unchanged (53% 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 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.

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.

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.

For the three months ended March 31, 2022, consolidated net income w as $214.3 million, or $14.94 per di luted share, compared to consolidated net income of $202.1 million, or $11.82 per diluted share, for the same period in 2021 primarily due to a decrease in operating expenses, a decrease in interest expense and an increase in other income.

Our results for the three months ended March 31, 2022 included:

• An increase in forecasted collection rates for Consumer Loans assigned in 2016, 2017 and 2019 through 2021, which increased forecasted net cash flows from our loan portfolio by $110.2 million.

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

• A decline in Consumer Loan assignment volume, as unit and dollar volumes declined 22.1% and 10.5%, respectively, as compared to the first quarter of 2021.

• Stock repurchases of approximately 802,000 shares, which represented 5.7% of the shares outstanding at the beginning of the quarter.

Critical Success Factors

Critical success factors include our ability to accurately forecast Consumer Loan performance, access capital on acceptable terms, and maintain or grow Consumer Loan volume at the level and on the terms that we anticipate, with an objective to maximize economic profit.

Economic profit is a non-GAAP financial measure we use to evaluate our financial results and determine incentive compensation.

Economic profit is a non-GAAP financial measure we use to evaluate our financial results and determine certain incentive compensation.

We also use economic profit as a framework to evaluate business decisions and strategies.

Economic profit measures how efficiently we utilize our total capital, both debt and equity, and is a function of the return on capital in excess of the cost of capital and the amount of capital invested in the business.

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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 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:

The following table compares our forecast of Consumer Loan collection rates as of March 31, 2022 with the forecasts as of December 31, 2021 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 September 30, 2021 June 30, 2021 December 31, 2020 Initial Forecast June 30, 2021 December 31, 2020 Initial Forecast

Consumer Loan Assignment Year March 31, 2022 December 31, 2021 Initial Forecast December 31, 2021 Initial Forecast

2013 73.4 % 73.4 % 72.0 % 0.0 % 1.4 %

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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 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 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 2013 and 2018 through 2021 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 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

For the three months ended March 31, 2022, forecasted collection rates improved for Consumer Loans assigned in 2016, 2017 and 2019 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 months ended March 31, 2022 and 2021 impacted forecasted net cash flows (forecasted collections less forecasted Dealer Holdback payments) as follows:

(In millions) For the Three Months Ended March 31,

Increase in Forecasted Net Cash Flows 2022 2021

Dealer Loans $ 33.9 $ 26.7

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Total $ 110.2 $ 107.4

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.

The reduction was comprised of:

(1) $44.3 million calculated by our forecasting model, which reflected lower realized collections during the first quarter of 2020 and (2) an additional $162.2 million, which represented our best estimate of the future impact of the COVID-19 pandemic on future net cash flows.

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.

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

During the first quarter of 2020, we applied a subjective adjustment to our forecasting model to reflect our best estimate of the future impact of the COVID-19 pandemic on future net cash flows (“COVID forecast adjustment”), which reduced our estimate of future net cash flows by $162.2 million.

We continued to apply the COVID forecast adjustment through the end of 2021 as it continued to represent our best estimate.

During the first quarter of 2022, we determined that we had sufficient Consumer Loan performance experience since the lapse of federal stimulus payments and enhanced unemployment benefits to refine our estimate of future net cash flows.

Accordingly, during the first quarter of 2022, we removed the COVID forecast adjustment and enhanced our methodology for forecasting the amount and timing of future net cash flows from our Loan portfolio through the utilization of more recent data and new forecast variables.

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

The removal of the COVID forecast adjustment and the implementation of the enhanced forecasting methodology impacted forecasted net cash flows and provision for credit losses as follows:

(In millions) Increase / (Decrease) in

Forecasting Methodology Changes Forecasted Net Cash Flows Provision for Credit Losses

Removal of COVID forecast adjustment $ 149.5 $ (118.5)

Implementation of enhanced forecasting methodology (53.8) 47.9

Total $ 95.7 $ (70.6)

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 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 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 September 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 September 30, 2021

As of March 31, 2022

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 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 September 30, 2021

2021 Consumer Loan Assignment Period Forecasted

Collection % Advance % Spread %

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 19.1% to 25.8%, 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 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:

The spreads in 2019 through 2021 were positively impacted by Consumer Loan performance, which has exceeded our initial estimates by a greater margin than the other years presented.

The decrease in the spread from 2021 to 2022 was primarily due to the performance of 2021 Consumer Loans, which has significantly exceeded our initial estimates, and a lower initial spread on 2022 Consumer Loans due to the advance rate increasing by a greater margin than the initial forecast.

The following table compares our forecast of Consumer Loan collection rates as of March 31, 2022 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 September 30, 2021 Initial

Forecast Variance September 30, 2021 Initial

Consumer Loan Assignment Year March 31, 2022 Initial

Forecast Variance March 31, 2022 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 September 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 March 31, 2022 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 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.

The spread on Dealer Loans decreased from 23.1% in 2021 to 20.0% in 2022 primarily as a result of the performance of the 2021 Consumer Loans in our Dealer Loan portfolio, which has significantly exceeded our initial estimates, and a lower initial spread on 2022 Consumer Loans in our Dealer Loan portfolio, due to the advance rate increasing by a greater margin than the initial forecast in our Dealer Loan portfolio.

The spread on Purchased Loans decreased from 21.1% in 2021 to 17.1% in 2022 primarily as a result of the performance of the 2021 Consumer Loans in our Purchased Loan portfolio, which has significantly exceeded our initial estimates, and a lower initial spread on 2022 Consumer Loans in our Purchased Loan portfolio, due to the advance rate increasing by a greater margin than the initial forecast 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 2.4 to 1 as of September 30, 2021.

Our funded debt to equity ratio was 2.9 to 1 as of March 31, 2022.

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 eleven 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 five quarters as compared to the same period in the previous year:

Year over Year Percent Change

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March 31, 2022 -22.1 % -10.5 %

June 30, 2020 5.7 % 5.2 %

September 30, 2020 -8.8 % -4.7 %

December 31, 2020 -18.1 % -10.8 %

March 31, 2021 -7.5 % -2.2 %

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 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 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

March 31, 2021 -16.8 %

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.

During the latter part of April 2020 and continuing into July 2020, 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 2020 and continuing through February 2021, 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 volumes improved again in March and April 2021 as additional federal stimulus payments were distributed.

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.

Unit and dollar volumes declined 22.1% and 10.5%, respectively, during the first quarter of 2022 as the number of active Dealers declined 9.4% and the average unit volume per active Dealer declined 14.6%.

We believe the significant decline in unit volume over the last four quarters was 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.

In addition, unit volume during the first four months of 2021 reflected the impact of the distribution of federal stimulus payments during that period.

Unit volume for April 2022 declined 13.8% compared to unit volume for April 2021, with the year-over-year change in unit volume improving significantly throughout the month.

Should recent trends continue for the remainder of 2022, we expect that the year-over-year change in unit volume would improve from April 2022, as the comparable 2021 period reflected a significant decline in unit volume.

Dollar volume declined less than unit volume during the first quarter of 2022 due to an increase in the average advance paid per unit.

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

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

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

2021 2020 % Change 2021 2020 % Change

For the Three Months Ended March 31,

2022 2021 % Change

Consumer Loan unit volume 73,116 93,874 -22.1 %

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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 September 30, For the Nine Months Ended September 30,

2021 2020 % Change 2021 2020 % Change

For the Three Months Ended March 31,

2022 2021 % Change

Consumer Loan unit volume from new active Dealers

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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 seven quarters:

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

Unit Volume Dollar Volume (1)

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March 31, 2022 72.7 % 27.3 % 68.6 % 31.4 %

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 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.

As of March 31, 2022 and December 31, 2021, the net Dealer Loans receivable balance was 62.0% and 61.3% , 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 September 30, 2021 Compared to Three Months Ended September 30, 2020

Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021

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,

2022 2021 $ Change % Change

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Finance Charges.

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 September 30,

The decrease of $0.8 million, or 0.2%, was the result of a decrease in the average net Loans receivable balance, partially offset by an increase in the average yield on our Loan portfolio, as follows:

(Dollars in millions) For the Three Months Ended March 31,

2022 2021 Change

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Average yield on our Loan portfolio 26.9 % 25.1 % 1.8 %

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

The following table summarizes the impact each component had on the overall increase in finance charges for the three months ended March 31, 2022:

(In millions) Year over Year Change

Impact on finance charges:

For the Three Months Ended September 30, 2021

For the Three Months Ended March 31, 2022

Due to an increase in the average yield $ 29.1

Due to a decrease in the average net Loans receivable balance (29.9)

Total increase in finance charges $ 37.7

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.

Total decrease in finance charges $ (0.8)

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

The average yield on our Loan portfolio for the three months ended March 31, 2022 increased as compared to the same period in 2021 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 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.

The increase of $6.1 million, or 52.1%, was primarily due to an increase in ancillary product profit sharing income primarily due to a decrease in average claim rates on Guaranteed Asset Protection contracts.

Operating Expenses .

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.

Th e decrease of $10.1 million, or 9.0%, was primarily due to:

• A decrease in general and administrative expense of $27.2 million, or 59.0%, primarily due to a decrease in legal expenses.

Legal expenses for the three months ended March 31, 2021 included a $27.2 million settlement with the Commonwealth of Massachusetts to settle and fully resolve the claims asserted against the Company.

• An increase in salaries and wages expense of $15.1 million, or 30.6%, primarily due to:

• An increase of $8.0 million in stock-based compensation expense, primarily 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.

Because stock-based awards subject to shareholder approval are not considered granted for accounting purposes until that approval is received, no stock-based compensation expense could be recognized with respect to those stock options until we received shareholder approval at the annual meeting on July 21, 2021.

• An increase of $7.1 million, excluding stock-based compensation expense and cash-based incentive compensation expense, primarily related to increases of $3.3 million for our servicing function and $3.1 million for our support function.

Provision for Credit Losses .

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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 September 30,

(In millions) For the Three Months Ended March 31,

Provision for Credit Losses 2022 2021 Change

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Total $ 23.3 $ 21.3 $ 2.0

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 September 30,

2021 2020 Change

Interest expense $ 39.8 $ 46.8 $ (7.0)

Average outstanding debt principal balance (1) 4,705.2 4,760.9 (55.7)

Average cost of debt 3.4 % 3.9 % -0.5 %

(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 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 Nine Months Ended

September 30,

2021 2020 $ Change % Change

Finance charges $ 1,312.4 $ 1,144.5 $ 167.9 14.7 %

Premiums earned 45.6 42.2 3.4 8.1 %

Other income 34.8 35.2 (0.4) -1.1 %

Total revenue 1,392.8 1,221.9 170.9 14.0 %

Costs and expenses:

Salaries and wages (1) 150.9 140.4 10.5 7.5 %

General and administrative (1) 79.9 46.8 33.1 70.7 %

Sales and marketing (1) 48.4 53.9 (5.5) -10.2 %

Provision for credit losses (17.5) 464.3 (481.8) -103.8 %

Interest 125.6 146.9 (21.3) -14.5 %

Provision for claims 29.3 28.8 0.5 1.7 %

Loss on extinguishment of debt — 7.4 (7.4) -100.0 %

Total costs and expenses 416.6 888.5 (471.9) -53.1 %

Income before provision for income taxes 976.2 333.4 642.8 192.8 %

Provision for income taxes 235.5 78.7 156.8 199.2 %

Net income $ 740.7 $ 254.7 $ 486.0 190.8 %

Net income per share:

Basic $ 44.77 $ 14.18 $ 30.59 215.7 %

Diluted $ 44.73 $ 14.17 $ 30.56 215.7 %

Weighted average shares outstanding:

Basic 16,543,326 17,957,931 (1,414,605) -7.9 %

Diluted 16,559,639 17,973,091 (1,413,452) -7.9 %

(1) Operating expenses $ 279.2 $ 241.1 $ 38.1 15.8 %

Finance Charges.

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 Nine Months Ended September 30,

2021 2020 Change

Average net Loans receivable balance $ 6,772.6 $ 6,724.3 $ 48.3

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 nine months ended September 30, 2021:

(In millions) Year over Year Change

Impact on finance charges:

For the Nine Months Ended September 30, 2021

Due to an increase in the average yield $ 159.7

Due to an increase in the average net Loans receivable balance 8.2

Total increase in finance charges $ 167.9

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 $33.1 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.

The smaller reversal of provision for credit losses related to forecast changes was primarily due to changes in the estimated timing of future net cash flows.

During the first quarters of 2022 and 2021, we increased our estimate of future net cash flows by $110.2 million and $107.4 million, respectively, to reflect improvements in Consumer Loan performance during the periods.

The results for the first quarter of 2022 include the impact of forecasting methodology changes, which increased our estimate of future net cash flows by $95.7 million and reduced our provision for credit losses by $70.6 million.

The forecasting methodology changes included the removal of the COVID forecast adjustment from our estimate of future net cash flows and an enhancement to our methodology for forecasting the amount and timing of future net cash flows from our Loan portfolio through the utilization of more recent data and new forecast variables.

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.

• 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.

Provision for Credit Losses .

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.

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:

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

Provision for Credit Losses 2021 2020 Change

New Consumer Loan assignments $ 298.9 $ 426.2 $ (127.3)

Forecast changes (316.4) 38.1 (354.5)

Total $ (17.5) $ 464.3 $ (481.8)

The decrease in provision for credit losses related to new Consumer Loan assignments was due to a 22.1% 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 2022 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 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 $7.3 million, or 16.7%, was primarily due to a decrease in our average cost of debt, as follows:

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

(Dollars in millions) For the Three Months Ended March 31,

2022 2021 Change

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

Loss on Extinguishment of Debt.

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 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 i s incorporated herein by reference.

For the three months ended March 31, 2022, the effective income tax rate increased to 24.7% from 23.5% for the three months ended March 31, 2021.

The increase was primarily 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 is 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 September 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 March 31, 2022.

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.

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

The financing will revolve for 24 months, after which it will amortize based upon the cash flows on the contributed Loans.

On January 29, 2021, we extended the date on which our $300.0 million Warehouse Facility IV will cease to revolve from July 26, 2022 to November 17, 2023.

The interest rate on borrowings under the facility has been increased from LIBOR plus 200 basis points to LIBOR plus 210 basis points.

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.

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 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 September 30, 2021 is as follows:

Cash and cash equivalents as of March 31, 2022 and December 31, 2021 was $17.6 million and $23.3 million, respectively.

As of March 31, 2022 and December 31, 2021, we had $1,229.3 million and $1,532.4 million, respectively, in unused and available lines of credit.

Our total balance sheet indebtedness as of March 31, 2022 and December 31, 2021 was $4,739.0 million and $4,616.3 million, respectively.

A summary of our scheduled principal debt maturities as of March 31, 2022 is as follows:

(In millions)

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Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021 discusses several critical accounting estimates, which we believe involve a high degree of judgment and complexity.

There have been no material changes to the estimates and assumptions associated with these accounting estimates from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2020.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

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

We continued to apply the COVID forecast adjustment through the end of 2021 as it continued to represent our best estimate.

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

The removal of the COVID forecast adjustment and the implementation of the enhanced forecasting methodology impacted forecasted net cash flows and provision for credit losses as follows:

(In millions) Increase / (Decrease) in

Forecasting Methodology Changes Forecasted Net Cash Flows Provision for Credit Losses

Removal of COVID forecast adjustment $ 149.5 $ (118.5)

Implementation of enhanced forecasting methodology (53.8) 47.9

Total $ 95.7 $ (70.6)

Forward-Looking Statements

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While we believe that our forward-looking statements are reasonable, actual results could differ materially since the statements are based on our current expectations, which are subject to risks and uncertainties.

Factors that might cause such a difference include, but are not limited to, the factors set forth in Item 1A of our Form 10-K for the year ended December 31, 2020, other risk factors discussed herein or listed from time to time in our reports filed with the SEC and the following:

Factors that might cause such a difference include, but are not limited to, the factors set forth in Item 1A of our Form 10-K for the year ended December 31, 2021 and Item 1A in Part II of this report, other risk factors discussed herein or listed from time to time in our reports filed with the SEC and the following:

Industry, Operational and Macroeconomic Risks

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• Adverse changes in economic conditions, the automobile or finance industries, or the non-prime consumer market could adversely affect our financial position, liquidity and results of operations, the ability of key vendors that we depend on to supply us with services, and our ability to enter into future financing transactions.

• Natural disasters, acts of war, terrorist attacks and threats or the escalation of military activity in response to these attacks or otherwise may negatively affect our business, financial condition and results of operations.

• Natural disasters, climate change, acts of war, terrorist attacks and threats or the escalation of military activity in response to these attacks or otherwise may negatively affect our business, financial condition and results of operations.

• Governmental or market responses to climate change and related environmental issues could have a material adverse effect on our business.

• Consequences of the current conflict between Russia and Ukraine could have a material adverse effect on our business, financial condition, liquidity and results of operations.

• A small number of our shareholders have the ability to significantly influence matters requiring shareholder approval and such shareholders have interests which may conflict with the interests of our other security holders.

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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