What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-01 compared with 2023-05-01 · 205 added, 69 removed, 315 unchanged (47% 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 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.

For the three months ended June 30, 2023, consolidated net income was $22.2 million, or $1.69 per diluted share, compared to consolidated net income of $107.4 million, or $7.94 per diluted share, for the same period in 2022, primarily due to increases in provision for credit losses on forecast changes and interest expense.

Our results for the three months ended June 30, 2023 included:

• A decrease in forecasted collection rates during the second quarter of 2023, which decreased forecasted net cash flows from our Loan portfolio by $89.3 million, or 0.9%, compared to a decrease in forecasted collection rates during the second quarter of 2022, which decreased forecasted net cash flows from our Loan portfolio by $43.4 million, or 0.5%.

The $89.3 million decrease in forecasted net cash flows for the second quarter of 2023 included the impact of an adjustment to our forecasting methodology, which upon implementation, decreased our estimate of future net cash flows by $44.5 million, or 0.5%.

In addition, forecasted net cash flow timing slowed during the second quarter of 2023, primarily as a result of a decrease in Consumer Loan prepayments to below-average levels.

Changes in the amount and timing of forecasted net cash flows are recognized in the period of change through provision for credit losses.

• Forecasted profitability per Consumer Loan assignment for Consumer Loans assigned in 2020 through 2022 that was lower than our estimates at June 30, 2022, due to a decline in forecasted collection rates since the second quarter of 2022 and slower forecasted net cash flow timing during 2023, primarily as a result of a decrease in Consumer Loan prepayments to below-average levels.

• Growth in Consumer Loan assignment volume, as unit and dollar volumes grew 12.8% and 8.3%, respectively, as compared to the second quarter of 2022.

The average balance of our Loan portfolio for the second quarter of 2023 increased 4.3% as compared to the second quarter of 2022.

• Initial spread on Consumer Loans assigned in the second quarter of 2023 increased to 21.2% compared to 20.0% on Consumer Loans assigned in the second quarter of 2022.

For the six months ended June 30, 2023, consolidated net income was $121.7 million, or $9.30 per diluted share, compared to consolidated net income of $321.7 million, or $23.10 per diluted share, for the same period in 2022, primarily due to increases in provision for credit losses on forecast changes and interest expense.

Our results for the six months ended June 30, 2023 included:

• A decrease in forecasted collection rates during the first six months of 2023, which decreased forecasted net cash flows from our Loan portfolio by $79.9 million, or 0.9%, compared to an increase in forecasted collection rates during the first six months of 2022, which increased forecasted net cash flows from our Loan portfolio by $66.8 million, or 0.7%.

The $79.9 million decrease in forecasted net cash flows for the first six months of 2023 included the impact of an adjustment to our forecasting methodology, which upon implementation, decreased our estimate of future net cash flows by $44.5 million, or 0.5%.

In addition, forecasted net cash flow timing slowed during the first six months of 2023, primarily as a result of a decrease in Consumer Loan prepayments to below-average levels.

Changes in the amount and timing of forecasted net cash flows are recognized in the period of change through provision for credit losses.

• Growth in Consumer Loan assignment volume, as unit and dollar volumes grew 17.8% and 13.3%, respectively, as compared to the first six months of 2022.

The average balance of our Loan portfolio for the first six months of 2023 increased 2.5% as compared to the first six months of 2022.

• Initial spread on Consumer Loans assigned in the first six months of 2023 increased to 21.1% compared to 19.7% on Consumer Loans assigned in the first six months of 2022.

Critical Success Factors

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

The following table compares our forecast of Consumer Loan collection rates as of March 31, 2023, with the forecasts as of December 31, 2022 and at the time of assignment, segmented by year of assignment:

The following table compares our forecast of Consumer Loan collection rates as of June 30, 2023, with the forecasts as of March 31, 2023, 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 March 31, 2023 December 31, 2022 Initial Forecast December 31, 2022 Initial Forecast

Consumer Loan Assignment Year June 30, 2023 March 31, 2023 December 31, 2022 Initial Forecast March 31, 2023 December 31, 2022 Initial Forecast

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

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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 2023 Consumer Loans as of June 30, 2023 includes both Consumer Loans that were in our portfolio as of March 31, 2023 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

2023 Consumer Loan Assignment Period June 30, 2023 March 31, 2023 Initial Forecast March 31, 2023 Initial Forecast

January 1, 2023 through March 31, 2023 67.4 % 67.2 % 67.1 % 0.2 % 0.3 %

April 1, 2023 through June 30, 2023 67.7 % — 67.9 % — -0.2 %

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 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,

For the three months ended June 30, 2023, forecasted collection rates 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.

For the six months ended June 30, 2023, forecasted collection rates improved for Consumer Loans assigned in 2018 and 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 and six months ended June 30, 2023 and 2022 impacted forecasted net cash flows (forecasted collections less forecasted Dealer Holdback payments) as follows:

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

Increase (Decrease) in Forecasted Net Cash Flows 2023 2022 2023 2022

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Total $ (89.3) $ (43.4) $ (79.9) $ 66.8

During the second quarter of 2023, we adjusted our methodology for forecasting the amount and timing of future net cash flows from our Loan portfolio through the utilization of more recent Consumer Loan performance and Consumer Loan prepayment data.

During the first half of 2023, we experienced a decrease in Consumer Loan prepayments to below-average levels and as a result, slowed our forecasted net cash flow timing.

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

Changes in the amount and timing of forecasted net cash flows are recognized in the period of change as a provision for credit losses.

The implementation of the adjustment to our forecasting methodology during the second quarter of 2023 reduced forecasted net cash flows by $44.5 million, or 0.5%, and increased provision for credit losses by $71.3 million.

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 2023 Consumer Loans include both Consumer Loans that were in our portfolio as of March 31, 2023 and Consumer Loans assigned during the most recent quarter.

The following table provides averages for each of these segments:

2023 Consumer Loan Assignment Period Consumer Loan Advance Initial Loan Term (in months)

January 1, 2023 through March 31, 2023 $ 26,592 $ 12,268 61

April 1, 2023 through June 30, 2023 27,260 12,726 61

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.

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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 March 31, 2023, as well as the forecasted collection rates and spread at the time of assignment.

The following table presents forecasted Consumer Loan collection rates, advance rates, the spread (the forecasted collection rate less the advance rate), and the percentage of the forecasted collections that had been realized as of June 30, 2023, as well as the forecasted collection rates and spread at the time of assignment.

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

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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)

Consumer Loan Assignment Year June 30, 2023 Initial Forecast Advance % (1) June 30, 2023 Initial Forecast % of Forecast Realized (2)

2014 71.7 % 71.8 % 47.7 % 24.0 % 24.1 % 99.7 %

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

(3) The forecasted collection rate, advance rate and spread for 2023 Consumer Loans as of June 30, 2023 include both Consumer Loans that were in our portfolio as of March 31, 2023 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:

Forecasted Collection % as of Spread % as of

2023 Consumer Loan Assignment Period June 30, 2023 Initial Forecast Advance % June 30, 2023 Initial Forecast

January 1, 2023 through March 31, 2023 67.4 % 67.1 % 46.1 % 21.3 % 21.0 %

April 1, 2023 through June 30, 2023 67.7 % 67.9 % 46.7 % 21.0 % 21.2 %

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

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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 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 spread between the forecasted collection rate as of June 30, 2023 and the advance rate ranges from 16.9% 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:

The spread with respect to 2022 Consumer Loans has been negatively impacted by Consumer Loan performance, which has been lower than 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 June 30, 2023 is primarily due to the performance of the 2022 Consumer Loans.

Additionally, 2023 Consumer Loans had a higher initial spread due to a decrease in the advance rate.

The following table compares our forecast of Consumer Loan collection rates as of June 30, 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 March 31, 2023 Initial

Forecast Variance March 31, 2023 Initial

Consumer Loan Assignment Year June 30, 2023 Initial

Forecast Variance June 30, 2023 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 March 31, 2023 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 June 30, 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).

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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 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.

The spread as of June 30, 2023 on 2023 Dealer Loans was 21.8%, as compared to a spread of 17.3% on 2022 Dealer Loans.

The increase was primarily as a result of Consumer Loan performance, as the performance of 2022 Dealer Loans has been significantly lower than our initial estimates.

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

The spread as of June 30, 2023 on 2023 Purchased Loans was 19.5%, as compared to a spread of 15.6% on 2022 Purchased Loans.

The increase was primarily as a result of Consumer Loan performance, as the performance of 2022 Purchased Loans has been significantly lower than our initial estimates, while the performance of 2023 Purchased Loans has exceeded our initial estimates.

Additionally, 2023 Purchased Loans had a higher initial spread, due to a higher initial forecast and a lower advance rate.

Access to Capital

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and (3) maintain multiple funding sources.

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

Our funded debt to equity ratio was 2.7 to 1 as of June 30, 2023.

We currently utilize the following primary forms of debt financing:

(1) a revolving secured line of credit;

(1) our revolving secured line of credit facility;

(2) Warehouse facilities;

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Consumer Loan Volume

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:

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

Year over Year Percent Change

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March 31, 2023 22.8 % 18.6 %

June 30, 2023 12.8 % 8.3 %

(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 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).

Unit and dollar volumes grew 12.8% and 8.3%, respectively, during the second quarter of 2023 as the number of active Dealers grew 16.1% and the average unit volume per active Dealer decreased 2.3%.

Dollar volume increased less than unit volume during the second 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 July 2023 grew 11.8% compared to unit volume for July 2022.

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

For the Three Months Ended March 31,

2023 2022 % Change

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

2023 2022 % Change 2023 2022 % Change

Consumer Loan unit volume 82,727 73,340 12.8 % 172,548 146,456 17.8 %

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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 March 31,

2023 2022 % Change

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

2023 2022 % Change 2023 2022 % 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 five quarters:

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

Unit Volume Dollar Volume (1)

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

June 30, 2023 72.4 % 27.6 % 68.6 % 31.4 %

(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 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.

As of June 30, 2023 and December 31, 2022, the net Dealer Loans receivable balance was 65.7% and 64.7% , 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 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

Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022

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

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Finance Charges.

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,

The increase of $15.4 million, or 3.6%, was the result of an increase in the average net Loans receivable balance, partially offset by a decrease in the average yield on our Loan portfolio, as follows:

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

2023 2022 Change

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Average yield on our Loan portfolio 26.7 % 26.9 % -0.2 %

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

The following table summarizes the impact each component had on the overall increase in finance charges for the three months ended June 30, 2023:

(In millions) Year over Year Change

Impact on finance charges:

For the Three Months Ended March 31, 2023

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

For the Three Months Ended June 30, 2023

Due to an increase in the average net Loans receivable balance $ 18.0

Total decrease in finance charges $ (3.0)

Due to a decrease in the average yield (2.6)

Total increase in finance charges $ 15.4

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

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

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Operating Expenses.

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.

The increase of $0.3 million, or 0.3%, was primarily due to:

• An increase in sales and marketing expense of $7.3 million, or 38.4%, primarily due to investments in our business to enhance our sales and marketing strategy, an increase in the size of our sales force, and an increase in sales commissions related to growth in Consumer Loan assignment volume.

• An increase in salaries and wages expense of $4.8 million, or 7.3%, 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 and an increase in fringe benefits primarily due to higher medical claims.

• A decrease in general and administrative expense of $11.8 million, or 36.5%, primarily due to a decrease in legal expenses.

Legal expenses for the three months ended June 30, 2022 included a $12.0 million settlement to settle and fully resolve a previously disclosed putative class action lawsuit.

Provision for Credit Losses .

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

The increase of $103.0 million, or 69.8%, was primarily 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.

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

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

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

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

Provision for Credit Losses 2023 2022 Change

Forecast changes $ 168.8 $ 50.0 $ 118.8

New Consumer Loan assignments 81.7 97.5 (15.8)

Total $ 250.5 $ 147.5 $ 103.0

The increase in provision for credit losses related to forecast changes was primarily due to a decline in Consumer Loan performance during the second quarter of 2023 compared to the second quarter of 2022.

During the second quarter of 2023, we decreased our estimate of future net cash flows by $89.3 million, or 0.9%, to reflect a decline in forecasted collection rates during the period and slowed our forecasted net cash flow timing to reflect a decrease in Consumer Loan prepayments to below-average levels.

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

We adjusted our methodology for forecasting the amount and timing of future net cash flows from our Loan portfolio through the utilization of more recent Consumer Loan performance and Consumer Loan prepayment data.

During the second quarter of 2022, we reduced our estimate of future net cash flows by $43.4 million, or 0.5%, to reflect a decline in Consumer Loan performance during the period.

The decrease in provision for credit losses related to new Consumer Loan assignments was primarily due to a 25.7% decrease in the average provision per Consumer Loan assignment, partially offset by a 12.8% 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 $23.9 million, or 61.4%, 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 June 30,

2023 2022 Change

Interest expense $ 62.8 $ 38.9 $ 23.9

Average outstanding debt principal balance (1) 4,754.3 4,795.4 (41.1)

Average cost of debt 5.3 % 3.2 % 2.1 %

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

Provision for Claims.

The increase in provision for claims of $7.5 million, or 61.5%, 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 three months ended June 30, 2023, the effective income tax rate decreased to 20.4% from 24.4% for the same period in 2022.

The decrease was primarily due to the settlement of an uncertain tax position for state income taxes during the second quarter of 2023, 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.

Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 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 Six Months Ended

2023 2022 $ Change % Change

Finance charges $ 862.1 $ 849.7 $ 12.4 1.5 %

Premiums earned 37.2 29.2 8.0 27.4 %

Other income 32.4 34.2 (1.8) -5.3 %

Total revenue 931.7 913.1 18.6 2.0 %

Costs and expenses:

Salaries and wages 147.4 129.8 17.6 13.6 %

General and administrative 38.5 51.2 (12.7) -24.8 %

Sales and marketing 48.4 38.2 10.2 26.7 %

Total operating expenses 234.3 219.2 15.1 6.9 %

Provision for credit losses on forecast changes 213.1 (29.3) 242.4 -827.3 %

Provision for credit losses on new Consumer Loan assignments 174.8 200.1 (25.3) -12.6 %

Total provision for credit losses 387.9 170.8 217.1 127.1 %

Interest 117.2 75.4 41.8 55.4 %

Provision for claims 37.6 21.1 16.5 78.2 %

Total costs and expenses 777.0 486.5 290.5 59.7 %

Income before provision for income taxes 154.7 426.6 (271.9) -63.7 %

Provision for income taxes 33.0 104.9 (71.9) -68.5 %

Net income $ 121.7 $ 321.7 $ (200.0) -62.2 %

Net income per share:

Basic $ 9.32 $ 23.23 $ (13.91) -59.9 %

Diluted $ 9.30 $ 23.10 $ (13.80) -59.7 %

Weighted average shares outstanding:

Basic 13,053,755 13,849,711 (795,956) -5.7 %

Diluted 13,085,988 13,927,372 (841,384) -6.0 %

Finance Charges.

The increase of $12.4 million, or 1.5%, was the result of an increase in the average net Loans receivable balance, partially offset by an decrease in the average yield on our Loan portfolio, as follows:

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

2023 2022 Change

Average net Loans receivable balance $ 6,476.3 $ 6,317.7 $ 158.6

Average yield on our Loan portfolio 26.6 % 26.9 % -0.3 %

The following table summarizes the impact each component had on the overall increase in finance charges for the six months ended June 30, 2023:

(In millions) Year over Year Change

Impact on finance charges:

For the Six Months Ended June 30, 2023

Due to an increase in the average net Loans receivable balance $ 21.3

Due to a decrease in the average yield (8.9)

Total increase in finance charges $ 12.4

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

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

Premiums Earned.

The increase of $8.0 million, or 27.4%, 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 $15.1 million, or 6.9%, was primarily due to:

• An increase in salaries and wages expense of $17.6 million, or 13.6%, 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 and an increase in fringe benefits primarily due to higher medical claims.

The impact of the increases in the number of team members and in fringe benefits was partially offset by a decrease in cash-based incentive compensation expense due to a decline in Company performance measures.

• An increase in sales and marketing expense of $10.2 million, or 26.7%, primarily due to investments in our business to enhance our sales and marketing strategy, an increase in the size of our sales force, and an increase in sales commissions related to growth in Consumer Loan assignment volume.

• A decrease in general and administrative expense of $12.7 million, or 24.8%, primarily due to a decrease in legal expenses.

Legal expenses for the six months ended June 30, 2022 included a $12.0 million settlement to settle and fully resolve a previously disclosed putative class action lawsuit.

Provision for Credit Losses .

The increase of $217.1 million, or 127.1%, 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.

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 Six Months Ended June 30,

Provision for Credit Losses 2023 2022 Change

Forecast changes $ 213.1 $ (29.3) $ 242.4

New Consumer Loan assignments 174.8 200.1 (25.3)

Total $ 387.9 $ 170.8 $ 217.1

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.

The increase in provision for credit losses related to forecast changes was primarily due to a decline in Consumer Loan performance during the first six months of 2023 compared to an improvement in Consumer Loan performance during the first six months of 2022.

During the first six months of 2023, we decreased our estimate of future net cash flows by $79.9 million, or 0.9%, to reflect a decline in forecasted collection rates during the period and slowed our forecasted net cash flow timing to reflect a decrease in Consumer Loan prepayments to below-average levels.

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.

During the first six months of 2022, we increased our estimate of future net cash flows by $66.8 million, or 0.7%, 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.

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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 provision for credit losses related to new Consumer Loan assignments was primarily due to a 25.6% decrease in the average provision per Consumer Loan assignment, partially offset by a 17.8% 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 $41.8 million, or 55.4%, 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,

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

2023 2022 Change

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Provision for Income Taxes.

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.

For the six months ended June 30, 2023, our effective income tax rate decreased to 21.3% from 24.6% for the six months ended June 30, 2022.

The decrease was primarily due to the impact of tax benefits related to our stock-based compensation plan and the settlement of an uncertain tax position for state income taxes during the second quarter of 2023, 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 i s 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.

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Our primary sources of capital are cash flows from operating activities, collections of Consumer Loans, and borrowings under:

(1) a revolving secured line of credit;

(1) our revolving secured line of credit facility;

(2) Warehouse facilities;

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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 March 31, 2023.

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

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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:

On May 25, 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 6.8% (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 underlying Loans.

On June 22, 2023, we extended the maturity of our revolving secured line of credit facility from June 22, 2025 to June 22, 2026.

Prior to this amendment, the amount of the facility was set to decrease by $25.0 million on June 22, 2023;

however, this amendment increased the amount of the facility by $5.0 million, resulting in a net decrease of $20.0 million, from $410.0 million to $390.0 million.

Cash and cash equivalents were $3.2 million as of June 30, 2023 and $7.7 million as of December 31, 2022.

As of June 30, 2023 and December 31, 2022, we had $1,416.1 million and $1,554.1 million, respectively, in unused and available lines of credit.

Our total balance sheet indebtedness increased to $4,746.6 million as of June 30, 2023 from $4,590.7 million as of December 31, 2022.

A summary of our scheduled principal debt maturities as of June 30, 2023 is as follows:

(In millions)

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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.

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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, 2022.

During the first half of 2023, we experienced a decrease in Consumer Loan prepayments to below-average levels and as a result, slowed our forecasted net cash flow timing.

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

Changes in the amount and timing of forecasted net cash flows are recognized in the period of change through provision for credit losses.

The implementation of the adjustment to our forecasting

methodology during the second quarter of 2023 reduced forecasted net cash flows by $44.5, or 0.5%, million and increased provision for credit losses by $71.3 million.

Forward-Looking Statements

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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