What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-05-01 compared with 2022-11-01 · 107 added, 224 removed, 277 unchanged (54% of the section changed)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included in Item 8 - Financial Statements and Supplementary Data, of our 2021 Annual Report on Form 10-K, as well as Part I - Item 1 - Financial Statements, of this Form 10-Q, which is incorporated herein by reference.

The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included in Item 8 - Financial Statements and Supplementary Data, of our 2022 Annual Report on Form 10-K, as well as Part I - Item 1 - Financial Statements, of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

We offer financing programs that enable automobile dealers to sell vehicles to consumers, regardless of their credit history.

2 unchanged sentences

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, 2022, consolidated net income was $86.8 million, or $6.49 per diluted share, compared to consolidated net income of $250.0 million, or $15.79 per diluted share, for the same period in 2021, primarily due to an increase in provision for credit losses and a decrease in finance charges.

Our results for the three months ended September 30, 2022 included:

• A decrease in forecasted collection rates for Consumer Loans assigned in 2019 through 2022, which decreased forecasted net cash flows from our Loan portfolio by $85.4 million, or 0.9%.

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

• Growth in Consumer Loan assignment volume, as unit and dollar volumes grew 29.3% and 32.1%, respectively, as compared to the third quarter of 2021.

• Stock repurchases of approximately 54,000 shares, which represented 0.4% of the shares outstanding at the beginning of the quarter.

For the nine months ended September 30, 2022, consolidated net income was $408.5 million, or $29.74 per diluted share, compared to consolidated net income of $740.7 million, or $44.73 per diluted share, for the same period in 2021, primarily due to an increase in provision for credit losses, an increase in operating expenses and a decrease in finance charges.

Our results for the nine months ended September 30, 2022 included:

• A decrease in forecasted collection rates for Consumer Loans assigned in 2022 and an increase in forecasted collection rates for Consumer Loans assigned in 2014, 2016, 2017 and 2021, which decreased forecasted net cash flows from our Loan portfolio by $18.6 million, or 0.2%.

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

• A decline in Consumer Loan assignment unit volume of 0.4%, while dollar volume grew 11.5%, as compared to the same period in 2021.

• Stock repurchases of approximately 1.3 million shares, which represented 8.9% of the shares outstanding at the beginning of the year.

• A $12.0 million expense in the second quarter of 2022, compared to a $27.2 million expense in the first quarter of 2021, related to previously-disclosed legal matters, and a $21.6 million increase in stock-based compensation expense primarily due to the retirement of our former Chief Executive Officer in May 2021 and the timing of shareholder approval for 2020 and 2021 stock option grants.

For the three months ended March 31, 2023, consolidated net income was $99.5 million, or $7.61 per diluted share, compared to consolidated net income of $214.3 million, or $14.94 per diluted share, for the same period in 2022, primarily due to increases in provision for credit losses on forecast changes, interest expense, and operating expenses.

Our results for the three months ended March 31, 2023 included:

• Forecasted profitability per Consumer Loan assignment for Consumer Loans assigned in 2020 through 2022 that was lower than our estimates at March 31, 2022, due to a decline in forecasted collection rates during the last three quarters of 2022 and slower net cash flow timing during the first quarter of 2023, primarily as a result of a decrease in Consumer Loan prepayments.

• Stable forecasted collection rates during the first quarter of 2023, with forecasted net cash flows from our Loan portfolio increasing by $9.4 million, or 0.1%.

In comparison, our results for the first quarter of 2022 reflected elevated Consumer Loan performance that followed the distribution of federal stimulus payments and enhanced unemployment benefits.

• Growth in Consumer Loan assignment volume, as unit and dollar volumes grew 22.8% and 18.6%, respectively, as compared to the first quarter of 2022.

The average balance of our Loan portfolio for the first quarter of 2023 increased 0.8% and 1.0% as compared to the first quarter of 2022 and the fourth quarter of 2022, respectively.

• Initial spread on Consumer Loans assigned in the first quarter of 2023 was 21.0% compared to 19.4% on Consumer Loans assigned in the first quarter of 2022 and 20.9% on Consumer Loans assigned in the fourth quarter of 2022.

• Growth in operating expenses of 14.4% as compared to the first quarter of 2022 primarily due to an increase in the number of team members in our engineering department as we are investing in our business to enhance our product and transform our technology systems to be more dealer- and customer-focused.

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 the objective to maximize economic profit over the long term.

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

Economic profit is a non-GAAP financial measure we use to evaluate our financial results and determine profit-sharing for team members.

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

7 unchanged sentences

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, 2022, with the forecasts as of June 30, 2022, as of December 31, 2021 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, 2023, with the forecasts as of December 31, 2022 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, 2022 June 30, 2022 December 31, 2021 Initial Forecast June 30, 2022 December 31, 2021 Initial Forecast

Consumer Loan Assignment Year March 31, 2023 December 31, 2022 Initial Forecast December 31, 2022 Initial Forecast

2014 71.7 % 71.7 % 71.8 % 0.0 % -0.1 %

11 unchanged sentences

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 2022 Consumer Loans as of September 30, 2022 includes both Consumer Loans that were in our portfolio as of June 30, 2022 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

2022 Consumer Loan Assignment Period September 30, 2022 June 30, 2022 Initial Forecast June 30, 2022 Initial Forecast

January 1, 2022 through June 30, 2022 66.3 % 67.1 % 67.6 % -0.8 % -1.3 %

July 1, 2022 through September 30, 2022 66.9 % — 67.1 % — -0.2 %

Consumer Loans assigned in 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.

Consumer Loans assigned in 2018 through 2020 have yielded forecasted collection results significantly better than our initial estimates, while Consumer Loans assigned in 2015, 2016, and 2022 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, 2022, forecasted collection rates declined for Consumer Loans assigned in 2019 through 2022 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, 2022 , forecasted collection rates improved for Consumer Loans assigned in 2014, 2016, 2017 and 2021, declined for Consumer Loans assigned in 2022, 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, 2022 and 2021 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,

For the three months ended March 31, 2023, forecasted collection rates improved for Consumer Loans assigned in 2019, declined for Consumer Loans assigned in 2021 and 2022, 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, 2023 and 2022 impacted forecasted net cash flows (forecasted collections less forecasted Dealer Holdback payments) as follows:

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

Increase (Decrease) in Forecasted Net Cash Flows 2023 2022

2 unchanged sentences

Total $ 9.4 $ 110.2

Total realized collections for October 2022 were consistent with our expectations at the start of the month.

However, we have not yet completed our analysis of the collection results to determine the impact on forecasted net cash flows.

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

13 unchanged sentences

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

(3) The averages for 2022 Consumer Loans include both Consumer Loans that were in our portfolio as of June 30, 2022 and Consumer Loans assigned during the most recent quarter.

The following table provides averages for each of these segments:

2022 Consumer Loan Assignment Period Consumer Loan Advance Initial Loan Term (in months)

January 1, 2022 through June 30, 2022 $ 27,118 $ 12,995 59

July 1, 2022 through September 30, 2022 27,357 12,820 60

The profitability of our loans is primarily driven by the amount and timing of the net cash flows we receive from the spread between the forecasted collection rate and the advance rate, less operating expenses and the cost of capital.

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, 2022.

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, 2022

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

Forecasted Collection % as of Spread % as of

Consumer Loan Assignment Year March 31, 2023 Initial Forecast Advance % (1) March 31, 2023 Initial Forecast % of Forecast Realized (2)

2014 71.7 % 71.8 % 47.7 % 24.0 % 24.1 % 99.6 %

11 unchanged sentences

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

(3) The forecasted collection rate, advance rate and spread for 2022 Consumer Loans as of September 30, 2022 include both Consumer Loans that were in our portfolio as of June 30, 2022 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, 2022

2022 Consumer Loan Assignment Period Forecasted

Collection % Advance % Spread %

January 1, 2022 through June 30, 2022 66.3 % 47.9 % 18.4 %

July 1, 2022 through September 30, 2022 66.9 % 46.9 % 20.0 %

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

1 unchanged sentence

Conversely, the forecasted collection rates for more recent Consumer Loan assignments are less certain as a significant portion of our forecast has not been realized.

The spread between the forecasted collection rate and the advance rate has ranged from 18.9% to 25.8%, on an annual basis, over the last 10 years.

The spreads in 2019 and 2020 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 Consumer Loan performance, as the performance of 2021 Consumer Loans has exceeded our initial estimates while the performance of 2022 Consumer Loans has been lower than 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 increase in the spread from the first six months of 2022 to the third quarter of 2022 was primarily due to Consumer Loan performance, as the performance of Consumer Loans assigned during the first six months of 2022 has been significantly lower than our initial estimates, and a higher initial spread on Consumer Loans assigned during the third quarter of 2022 due to the advance rate decreasing by a greater margin than the initial forecast.

The following table compares our forecast of Consumer Loan collection rates as of September 30, 2022 with the forecasts at the time of assignment, for Dealer Loans and Purchased Loans separately:

The spread between the forecasted collection rate as of March 31, 2023 and the advance rate ranges from 18.6% to 24.0%, on an annual basis, for Consumer Loans assigned over the last 10 years.

The spreads with respect to 2019 and 2020 Consumer Loans have been positively impacted by Consumer Loan performance, which has exceeded our initial estimates by a greater margin than the other years presented.

The higher spread for 2023 Consumer Loans relative to 2022 Consumer Loans as of March 31, 2023 is primarily due to Consumer Loan performance, as the performance of 2022 Consumer Loans has been significantly lower than our initial estimates.

Additionally, 2023 Consumer Loans had a higher initial spread, due to the advance rate decreasing by a greater margin than the initial forecast.

The following table compares our forecast of Consumer Loan collection rates as of March 31, 2023 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, 2022 Initial

Forecast Variance September 30, 2022 Initial

Consumer Loan Assignment Year March 31, 2023 Initial

Forecast Variance March 31, 2023 Initial

Forecast Variance

13 unchanged sentences

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, 2022 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, 2023 for Dealer Loans and Purchased Loans separately.

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

15 unchanged sentences

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 21.5% in 2021 to 19.6% in 2022 primarily as a result of Consumer Loan performance, as the performance of 2021 Consumer Loans in our Dealer Loan portfolio has exceeded our initial estimates while the performance of 2022 Consumer Loans in our Dealer Loan portfolio has been significantly lower than 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 19.6% in 2021 to 17.2% in 2022 primarily as a result of Consumer Loan performance, as the performance of the 2021 Consumer Loans in our Purchased Loan portfolio has significantly exceeded our initial estimates while the performance of 2022 Consumer Loans in our Purchased Loan portfolio has been lower than 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.

The spread as of March 31, 2023 on 2023 Dealer Loans was 21.9%, as compared to a spread of 19.0% on 2022 Dealer Loans, primarily as a result of Consumer Loan performance, as the performance of 2022 Consumer Loans in our Dealer Loan portfolio has been significantly lower than our initial estimates.

Additionally, 2023 Consumer Loans in our Dealer Loan portfolio had a higher initial spread, due to the advance rate decreasing by a greater margin than the initial forecast.

The spread as of March 31, 2023 on 2023 Purchased Loans was 19.2%, as compared to a spread of 17.3% on 2022 Purchased Loans, primarily as a result of a higher initial spread on 2023 Consumer Loans in our Purchased Loan portfolio, due to the lower

advance rate on 2023 Purchased Loans relative to the advance rate on 2022 Purchased Loans.

Additionally, the performance of 2022 Consumer Loans in our Purchased Loan portfolio has been lower than our initial estimates.

Access to Capital

3 unchanged sentences

and (3) maintain multiple funding sources.

Our funded debt to equity ratio was 2.9 to 1 as of September 30, 2022.

Our funded debt to equity ratio was 2.7 to 1 as of March 31, 2023.

We currently utilize the following primary forms of debt financing:

4 unchanged sentences

Consumer Loan Volume

The following table summarizes changes in Consumer Loan assignment volume in each of the last seven 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

5 unchanged sentences

March 31, 2023 22.8 % 18.6 %

June 30, 2022 5.1 % 22.0 %

September 30, 2022 29.3 % 32.1 %

(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.

2 unchanged sentences

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 grew 29.3% and 32.1%, respectively, during the third quarter of 2022 as the number of active Dealers grew 12.6% and the average unit volume per active Dealer grew 15.1%.

Unit volume for October 2022 grew 21.2% compared to unit volume for October 2021.

The comparable 2021 periods reflected significant declines in unit volume, which we believe were primarily due to low dealer inventories and elevated used vehicle prices, which we believe were primarily due to the downstream impact of supply chain disruptions in the automotive industry.

Unit and dollar volumes grew 22.8% and 18.6%, respectively, during the first quarter of 2023 as the number of active Dealers grew 18.1% and the average unit volume per active Dealer grew 4.5%.

Dollar volume increased less than unit volume during the first quarter of 2023 due to a decrease in the average advance paid, primarily due to a decrease in the average advance rate.

Unit volume for April 2023 grew 13.9% compared to unit volume for April 2022.

April 2023 was negatively impacted as it had one less business day as compared to the same period in 2022 (26 business days in April 2022 compared to 25 business days in April 2023).

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,

2022 2021 % Change 2022 2021 % Change

For the Three Months Ended March 31,

2023 2022 % Change

Consumer Loan unit volume 89,821 73,116 22.8 %

14 unchanged sentences

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,

2022 2021 % Change 2022 2021 % Change

For the Three Months Ended March 31,

2023 2022 % Change

Consumer Loan unit volume from new active Dealers

8 unchanged sentences

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)

5 unchanged sentences

March 31, 2023 72.1 % 27.9 % 68.1 % 31.9 %

June 30, 2022 74.0 % 26.0 % 70.4 % 29.6 %

September 30, 2022 74.3 % 25.7 % 70.5 % 29.5 %

(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, 2022 and December 31, 2021, the net Dealer Loans receivable balance was 64.1% and 61.3% , respectively, of the total net Loans receivable balance.

As of March 31, 2023 and December 31, 2022, the net Dealer Loans receivable balance was 65.2% and 64.7% , respectively, of the total net Loans receivable balance.

Results of Operations

2 unchanged sentences

We do not believe the GAAP methodology we employ (known as CECL) 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 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, 2022 Compared to Three Months Ended September 30, 2021

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

Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022

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,

2023 2022 $ Change % Change

7 unchanged sentences

Sales and marketing 22.1 19.2 2.9 15.1 %

Provision for credit losses 180.3 (8.3) 188.6 -2,272.3 %

Total operating expenses 117.3 102.5 14.8 14.4 %

Provision for credit losses on forecast changes 44.3 (79.3) 123.6 -155.9 %

Provision for credit losses on new Consumer Loan assignments 93.1 102.6 (9.5) -9.3 %

Total provision for credit losses 137.4 23.3 114.1 489.7 %

Interest 54.4 36.5 17.9 49.0 %

10 unchanged sentences

Diluted 13,073,316 14,341,523 (1,268,207) -8.8 %

(1) Operating expenses $ 103.2 $ 96.4 $ 6.8 7.1 %

Finance Charges.

The decrease of $21.5 million, or 4.9%, was primarily the result of a decrease in the average net Loans receivable balance, as follows:

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

The decrease of $3.0 million, or 0.7%, was primarily the result of a decrease in the average yield on our Loan portfolio, as follows:

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

2023 2022 Change

1 unchanged sentence

Average yield on our Loan portfolio 26.5 % 26.9 % -0.4 %

The following table summarizes the impact each component had on the overall decrease in finance charges for the three months ended September 30, 2022:

The following table summarizes the impact each component had on the overall decrease in finance charges for the three months ended March 31, 2023:

(In millions) Year over Year Change

Impact on finance charges:

For the Three Months Ended September 30, 2022

Due to a decrease in the average net Loans receivable balance $ (23.9)

Due to an increase in the average yield 2.4

For the Three Months Ended March 31, 2023

Due to a decrease in the average yield $ (6.3)

Due to an increase in the average net Loans receivable balance 3.3

Total decrease in finance charges $ (3.0)

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.

Other Income .

The increase of $10.7 million, or 84.9%, was primarily due to:

• A $5.2 million increase in remarketing fee income for fees related to the repossession and remarketing of vehicles, which included $4.5 million of fees charged to dealers for repossession activity that occurred from August 2020 through June 2022.

• A $4.1 million increase in ancillary product profit sharing income primarily due to a decrease in average claim rates on Guaranteed Asset Protection (“GAP”) contracts.

Operating Expenses.

The increase of $6.8 million, or 7.1%, was primarily due to:

• An increase in salaries and wages expense of $3.7 million, or 5.9%, primarily due to:

• An increase of $10.1 million, excluding stock-based compensation expense, primarily related to an increase in the number of team members in our technology department .

• A decrease of $6.4 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.

Accordingly, the first annual vesting installment was recognized over the period from July 2021 through the first anniversary of the date on which the options were granted, resulting in a higher expense during the third quarter of 2021.

• An increase in sales and marketing expense of $3.4 million, or 20.9%, primarily due to a change in the compensation plan for our sales force in September 2021, an increase in the size of our sales force, and growth in Consumer Loan assignment unit volume.

Provision for Credit Losses .

The increase of $188.6 million was primarily due to an increase in provision for credit losses on forecast changes.

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 Three Months Ended September 30,

Provision for Credit Losses 2022 2021 Change

New Consumer Loan assignments $ 83.4 $ 75.5 $ 7.9

Forecast changes 96.9 (83.8) 180.7

Total $ 180.3 $ (8.3) $ 188.6

The increase in provision for credit losses related to forecast changes was primarily due to a decline in Consumer Loan performance during the third quarter of 2022 compared to an improvement in Consumer Loan performance during the third quarter of 2021.

During the third quarter of 2022, we reduced our estimate of future net cash flows by $85.4 million to reflect a decline in Consumer Loan performance during the period.

During the third quarter of 2021, we increased our estimate of future net cash flows by $82.3 million to reflect an improvement in Consumer Loan performance during the period.

The increase in p rovision for credit losses related to new Consumer Loan assignmen ts was primarily due to a 29.3% increase in Consumer Loan assignment unit volume, partially offset by a decrease in the average provision per Consumer Loan assignment.

Provision for Income Taxes .

For the three months ended September 30, 2022, the effective income tax rate increased to 28.9% from 24.7% for the three months ended September 30, 2021.

The increase was primarily due to changes in state and local tax laws that were enacted during the third quarter of 2022 and the impact of non-deductible expenses on our effective income tax rate, which increased in magnitude from 2021 to 2022 primarily due to a decrease in pre-tax income.

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

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 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 Nine Months Ended

September 30,

2022 2021 $ Change % Change

Finance charges $ 1,270.3 $ 1,312.4 $ (42.1) -3.2 %

The decrease in the average yield of our Loan portfolio was primarily due to lower contractual yields on more recent consumer loan assignments.

Premiums Earned.

Other income 57.5 34.8 22.7 65.2 %

Total revenue 1,373.4 1,392.8 (19.4) -1.4 %

Costs and expenses:

Salaries and wages (1) 196.7 150.9 45.8 30.4 %

General and administrative (1) 67.8 79.9 (12.1) -15.1 %

Sales and marketing (1) 57.9 48.4 9.5 19.6 %

Provision for credit losses 351.1 (17.5) 368.6 -2,106.3 %

Interest 117.2 125.6 (8.4) -6.7 %

Provision for claims 34.0 29.3 4.7 16.0 %

Total costs and expenses 824.7 416.6 408.1 98.0 %

Income before provision for income taxes 548.7 976.2 (427.5) -43.8 %

Provision for income taxes 140.2 235.5 (95.3) -40.5 %

Net income $ 408.5 $ 740.7 $ (332.2) -44.8 %

Net income per share:

Basic $ 29.90 $ 44.77 $ (14.87) -33.2 %

Diluted $ 29.74 $ 44.73 $ (14.99) -33.5 %

Weighted average shares outstanding:

Basic 13,662,178 16,543,326 (2,881,148) -17.4 %

Diluted 13,737,871 16,559,639 (2,821,768) -17.0 %

(1) Operating expenses $ 322.4 $ 279.2 $ 43.2 15.5 %

Finance Charges.

The decrease of $42.1 million, or 3.2%, was primarily 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 Nine Months Ended September 30,

2022 2021 Change

Average net Loans receivable balance $ 6,316.9 $ 6,772.6 $ (455.7)

Average yield on our Loan portfolio 26.8 % 25.8 % 1.0 %

The following table summarizes the impact each component had on the overall decrease in finance charges for the nine months ended September 30, 2022:

(In millions) Year over Year Change

Impact on finance charges:

For the Nine Months Ended September 30, 2022

Due to a decrease in the average net Loans receivable balance $ (88.3)

Due to an increase in the average yield 46.2

Total decrease in finance charges $ (42.1)

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 nine months ended September 30, 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 $22.7 million, or 65.2%, was primarily due to:

• A $16.3 million increase in ancillary product profit sharing income primarily due to a decrease in average claim rates on GAP contracts.

• A $5.0 million increase in remarketing fee income for fees related to the repossession and remarketing of vehicles, which included $3.1 million of fees charged to dealers for repossession activity that occurred from August 2020 through December 2021.

The increase of $3.6 million, or 26.1%, was primarily due to growth in the size of our reinsurance portfolio, which resulted from growth in new Consumer Loan assignments and an increase in the average premiums written in recent periods.

Operating Expenses.

The increase of $43.2 million, or 15.5%, was primarily due to:

• An increase in salaries and wages expense of $45.8 million, or 30.4%, primarily due to:

• An increase of $24.2 million, excluding stock-based compensation expense, primarily related to an increase in the number of team members in our technology department.

• An increase of $21.6 million in stock-based compensation expense, primarily related to:

• An $11.5 million reversal of expense during the second quarter of 2021 due to the forfeiture of unvested restricted stock and restricted stock units upon the retirement of our former Chief Executive Officer in May 2021.

• An increase of $10.4 million 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.

• A decrease in general and administrative expense of $12.1 million, or 15.1%, prim arily due to a decrease in legal expenses.

Legal expenses for the nine months ended September 30, 2021 included a $27.2 million settlement with the Commonwealth of Massachusetts to settle and fully resolve the claims asserted by the Commonwealth of Massachusetts against the Company, while l egal expenses for the nine months ended September 30, 2022 included the recognition of a $12.0 million contingent loss related to the Company reaching an agreement in principle to settle a previously-disclosed putative class action lawsuit.

The increase of $14.8 million, or 14.4%, was primarily due to an increase in salaries and wages expense of $12.8 million, or 19.9%, primarily due to an increase in the number of team members in our engineering department as we are investing in our business to enhance our product and transform our technology systems to be more dealer- and customer-focused.

Provision for Credit Losses .

The increase of $368.6 million was due to an increase in provision for credit losses on forecast changes, partially offset by a decrease in provision for credit losses on new Consumer Loan assignments.

The increase of $114.1 million, or 489.7%, was primarily due to an increase in provision for credit losses on forecast changes.

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.

1 unchanged sentence

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

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

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

Provision for Credit Losses 2023 2022 Change

2 unchanged sentences

Total $ 137.4 $ 23.3 $ 114.1

The increase in provision for credit losses related to forecast changes was primarily due to a decline in Consumer Loan performance during the first nine months of 2022 compared to an improvement in Consumer Loan performance during the same period in 2021.

During the first nine months of 2022, we reduced our estimate of future net cash flows by $18.6 million to reflect a decline in Consumer Loan performance during the period.

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.

The results for the first nine months of 2022 include the impact of forecasting methodology changes implemented during the first quarter, which upon implementation 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.

The decrease in provision for credit losses related to new Consumer Loan assignments was primarily due to a 0.4% decrease in Consumer Loan assignment unit volume and a decrease in the average provision per Consumer Loan assignment.

The increase in provision for credit losses related to forecast changes was primarily due to an improvement in Consumer Loan performance during the first quarter of 2022.

During the first quarter of 2023, we increased our estimate of future net cash flows by $9.4 million, or 0.1%, to reflect stable forecasted collection rates during the period;

however, we recognized a $44.3 million provision for credit losses on forecast changes due to slower net cash flow timing primarily as a result of a decrease in Consumer Loan prepayments.

Historically, Consumer Loan prepayments have been lower in periods with less availability of consumer credit.

During the first quarter of 2022, we increased our estimate of future net cash flows by $110.2 million, or 1.2%, to reflect an improvement in Consumer Loan performance during the period.

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

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

The decrease in provision for credit losses related to new Consumer Loan assignments was primarily due to a 26.1% decrease in the average provision per Consumer Loan assignment, partially offset by a 22.8% increase in Consumer Loan assignment unit volume.

The decrease in the average provision per Consumer Loan assignment was primarily due to a decrease in the average advance rate for 2023 Consumer Loans.

The increase in interest expense of $17.9 million, or 49.0%, was primarily due to an increase in our average cost of debt, which was primarily the result of higher interest rates on recently-completed secured financings, as follows:

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

2023 2022 Change

Interest expense $ 54.4 $ 36.5 $ 17.9

Average outstanding debt principal balance (1) 4,615.9 4,614.3 1.6

Average cost of debt 4.7 % 3.2 % 1.5 %

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

Provision for Claims.

The increase in provision for claims of $9.0 million, or 101.1%, was primarily due to an increase in claims paid per reinsured vehicle service contract and an increase in the size of our reinsurance portfolio.

Provision for Income Taxes .

For the nine months ended September 30, 2022, our effective income tax rate increased to 25.6% from 24.1% for the nine months ended September 30, 2021.

The increase was primarily due to changes in state and local tax laws that were enacted during the third quarter of 2022 and an increase in non-deductible executive compensation expense.

Additionally, the impact of non-deductible expenses on our effective income tax rate also increased in magnitude from 2021 to 2022 due to a decrease 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, 2023, the effective income tax rate decreased to 21.5% from 24.7% for the same period in 2022.

The decrease was primarily due to the impact of tax benefits related to our stock-based compensation plan, partially offset by an increase in non-deductible executive compensation expense.

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

The COVID-19 pandemic had a significant impact on our work environment, as the vast majority of our team members began working remotely.

3 unchanged sentences

Therefore, we believe we will always have a need for some amount of office space.

As a result of the “remote first” strategy, we have excess space in the two office buildings that we own in Southfield, Michigan and the office space that we lease in Henderson, Nevada.

Our Henderson lease, which we will not renew, expires in December 2022.

We are currently considering options to further reduce our office space, which could result in the sale of one or both of our buildings.

As a result of the “remote first” strategy, we have excess space in the two office buildings that we own in Southfield, Michigan.

We are actively exploring options to reduce our office space, which could result in the sale of one or both of our buildings.

As there is currently a significant amount of unoccupied office space in Southfield, we believe the market value of our buildings and improvements, land and land improvements, and office furniture and equipment is significantly less than their combined carrying value of $37.3 million.

7 unchanged sentences

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, 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 June 16, 2022, we completed a $350.0 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 5.4% (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 June 16, 2022, we extended the date on which our $300.0 million Warehouse Facility IV will cease to revolve from November 17, 2023 to May 20, 2025.

On June 22, 2022, we extended the maturity of our revolving secured line of credit facility from June 22, 2024 to June 22, 2025.

Prior to this amendment, the amount of the facility was set to decrease by $35.0 million on June 22, 2022;

however, this amendment increased the amount of the facility by $10.0 million, resulting in a net decrease of $25.0 million, from $435.0 million to $410.0 million.

As previously reported, the amount of the facility will further decrease by $25.0 million on June 22, 2023.

Additionally, this amendment removed the covenant that required us to maintain consolidated net income of not less than $1 for the two most recently ended fiscal quarters.

On August 12, 2022, we extended by three years the $500.0 million Term ABS financing that we entered into on August 28, 2019 and to which we refer as Term ABS 2019‑2.

Under the amendment effecting the extension, the date on which the financing will cease to revolve has been extended from August 15, 2022 to August 15, 2025.

The amendment has also increased the interest rate under the financing from 3.13% to 5.15%.

Cash and cash equivalents as of September 30, 2022 and December 31, 2021 was $10.7 million and $23.3 million, respectively.

As of September 30, 2022 and December 31, 2021, we had $1,171.1 million and $1,532.4 million, respectively, in unused and available lines of credit.

Our total balance sheet indebtedness increased to $4,625.9 million as of September 30, 2022 from $4,616.3 million as of December 31, 2021, primarily due to stock repurchases.

A summary of our scheduled principal debt maturities as of September 30, 2022 is as follows:

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, 2023.

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 Quarterly Report on Form 10-Q, which is incorporated herein by reference.

On March 16, 2023, we completed a $400.0 million Term ABS financing, which was used to repay outstanding indebtedness and for general corporate purposes.

The financing has an expected average annualized cost of 7.3% (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 underlying Loans.

On April 28, 2023, we extended the date on which our $400.0 million Warehouse Facility II will cease to revolve from April 30, 2024 to April 30, 2026.

The interest rate on borrowings under the facility has been increased from LIBOR plus 175 basis points to SOFR plus 230 basis points.

Cash and cash equivalents were $8.1 million as of March 31, 2023 and $7.7 million as of December 31, 2022.

As of March 31, 2023 and December 31, 2022, we had $1,439.9 million and $1,554.1 million, respectively, in unused and available lines of credit.

Our total balance sheet indebtedness increased to $4,720.7 million as of March 31, 2023 from $4,590.7 million as of December 31, 2022.

A summary of our scheduled principal debt maturities as of March 31, 2023 is as follows:

(In millions)

5 unchanged sentences

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.

Our ability to borrow funds may be impacted by economic and financial market conditions.

Our ability to borrow funds may be

impacted by economic and financial market conditions.

If the various financing alternatives were to become limited or unavailable to us, our operations and liquidity could be materially and adversely affected.

4 unchanged sentences

Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022 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, 2021, except as described below:

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 during the first quarter of 2022 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

6 unchanged sentences

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, 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:

Factors that might cause such a difference include, but are not limited to, the factors set forth in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022, 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

• The outbreak of COVID-19 has adversely impacted our business, and the continuance of this pandemic, or any future outbreak of any contagious diseases or other public health emergency, could materially and adversely affect our business, financial condition, liquidity and results of operations.

• Our inability to accurately forecast and estimate the amount and timing of future collections could have a material adverse effect on results of operations.

• Due to competition from traditional financing sources and non-traditional lenders, we may not be able to compete successfully.

• An outbreak of contagious disease, such as the COVID-19 pandemic, or other public health emergency could materially and adversely affect our business, financial condition, liquidity, and results of operations.

• Reliance on third parties to administer our ancillary product offerings could adversely affect our business and financial results.

3 unchanged sentences

• Reliance on our outsourced business functions could adversely affect our business.

• Our ability to hire and retain foreign information technology personnel could be hindered by immigration restrictions.

• Our ability to hire and retain foreign engineering personnel could be hindered by immigration restrictions.

• We may be unable to execute our business strategy due to current economic conditions.

• 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, 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.

• Natural disasters, climate change, military conflicts, acts of war, terrorist attacks and threats, or the escalation of military activity in response to terrorist 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.

2 unchanged sentences

• The terms of our debt limit how we conduct our business.

• A violation of the terms of our asset-backed secured financing facilities or revolving secured warehouse facilities could have a material adverse impact on our operations.

• A violation of the terms of our asset-backed secured financings or revolving secured warehouse facilities could have a material adverse impact on our operations.

• Our substantial debt could negatively impact our business, prevent us from satisfying our debt obligations, and adversely affect our financial condition.

7 unchanged sentences

and international capital markets may adversely affect lenders with which we have relationships, causing us to incur additional costs and reducing our sources of liquidity, which may adversely affect our financial position, liquidity, and results of operations.

Information Technology and Cybersecurity Risks

Technology and Cybersecurity Risks

• Our dependence on technology could have a material adverse effect on our business.

9 unchanged sentences

Refer to our Annual Report on Form 10-K for the year ended December 31, 2022 for a complete discussion of our market risk.

There have been no material changes to the market risk information included in our 2021 Annual Report on Form 10-K.

There have been no material changes to the market risk information included in our Annual Report on Form 10-K for the year ended December 31, 2022.

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