What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-12 compared with 2023-02-10 · 162 added, 100 removed, 372 unchanged (41% of the section changed)

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For the year ended December 31, 2023, consolidated net income was $286.1 million, or $21.99 per diluted share, compared to $535.8 million, or $39.32 per diluted share, for the same period in 2022.

The decrease in consolidated net income was primarily due to an increase in provision for credit losses, a decrease in finance charges, and an increase in operating expenses.

The increase in provision for credit losses was primarily due to a decline in Consumer Loan performance.

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

The increase in operating expenses was primarily related to an increase in the number of team members in our engineering department.

The decrease in consolidated net income was primarily due to increases in provision for credit losses and interest expense.

Our results for the year ended December 31, 2023 included:

• A decrease in forecasted collection rates for Consumer Loans assigned in 2021 and 2022, which decreased forecasted net cash flows from our loan portfolio by $59.7 million, or 0.7%.

• Forecasted profitability per Consumer Loan assignment that significantly exceeded our initial estimates for Consumer Loans assigned in 2018 through 2020 and was significantly less than our initial estimates for Consumer Loans assigned in 2022.

• An increase in Consumer Loan assignment volume, as unit and dollar volumes increased 4.4% and 14.5%, respectively, as compared to 2021.

• Stock repurchases of approximately 1.5 million shares, which represented 10.4% of the shares outstanding at the beginning of the year.

• A larger decrease in forecasted collection rates

The decrease in forecasted collection rates decreased forecasted net cash flows from our Loan portfolio by $206.3 million, or 2.3%, compared to a decrease in forecasted collection rates during 2022 that decreased forecasted net cash flows from our Loan portfolio by $59.7 million, or 0.7%.

• A decrease in forecasted profitability for Consumer Loans assigned in 2020 through 2022

Forecasted profitability was lower than our estimates at December 31, 2022, due to a decline in forecasted collection rates during 2023 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 and the average balance of our Loan portfolio

Unit and dollar volumes grew 18.6% and 14.4%, respectively, as compared to 2022.

The average balance of our Loan portfolio increased 5.0% as compared to 2022.

• An increase in the initial spread on Consumer Loan assignments

The initial spread increased to 21.3% compared to 20.1% on Consumer Loans assigned in 2022.

• An increase in our average cost of debt

The increase in our average cost of debt was primarily a result of higher interest rates on recently-completed or extended secured financings and the repayment of older secured financings with lower interest rates.

• A decrease in common shares outstanding due to stock repurchases

We repurchased 0.4 million shares, or 2.8% of the shares outstanding at the beginning of the year.

For the year ended December 31, 2022, consolidated net income was $535.8 million, or $39.32 per diluted share, compared to $958.3 million, or $59.52 per diluted share, for the same period in 2021.

The increase in consolidated net income was primarily due to a decrease in provision for credit losses and an increase in finance charges.

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

The increase in finance charges was primarily due to an increase in the average yield on our Loan portfolio, which was primarily the result of the adoption of the current expected credit loss (“CECL”) accounting standard on January 1, 2020.

The decrease in consolidated net income was primarily due to an increase in provision for credit losses, a decrease in finance charges, and an increase in operating expenses.

Our results for the year ended December 31, 2022 included:

• An increase in forecasted collection rates for Consumer Loans assigned in 2017 through 2021, which increased forecasted net cash flows from our loan portfolio by $326.1 million, or 3.4%.

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

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

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

• A decrease in forecasted collection rates

The decrease in forecasted collection rates decreased forecasted net cash flows from our Loan portfolio by $59.7 million, or 0.7%, compared to an increase in forecasted collection rates during 2021 that increased forecasted net cash flows from our Loan portfolio by $326.1 million, or 3.4%.

• A decrease in forecasted profitability for Consumer Loans assigned in 2021 and 2022

Forecasted profitability for Consumer Loans assigned in 2022 was lower than our initial estimates and forecasted profitability for Consumer Loans assigned in 2021 was lower than our estimates at December 31, 2021, due to a decline in forecasted collection rates during 2022.

• Growth in Consumer Loan assignment volume and a decline in the average balance of our Loan portfolio

Unit and dollar volumes grew 4.4% and 14.5%, respectively, as compared to 2021.

The average balance of our Loan portfolio decreased 5.7% as compared to 2021.

• A decrease in the initial spread on Consumer Loan assignments

The initial spread decreased to 20.1% compared to 20.3% on Consumer Loans assigned in 2021.

• An increase in operating expenses

The increase in operating expenses was primarily due to investments in our business to enhance our product and transform our technology systems to be more Dealer- and customer-focused.

• A decrease in common shares outstanding due to stock repurchases

We repurchased 1.5 million shares, or 10.4% of the shares outstanding at the beginning of the year.

Critical Success Factors

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We use a statistical model to estimate the expected collection rate for each Consumer Loan at the time of assignment.

We continue to evaluate the expected collection rate of each Consumer Loan subsequent to assignment.

We continue to evaluate the expected collection rate for each Consumer Loan subsequent to assignment.

Our evaluation becomes more accurate as the Consumer Loans age, as we use actual performance data in our forecast.

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 December 31, 2022, with the forecasts as of December 31, 2021, as of December 31, 2020, and at the time of assignment, segmented by year of assignment:

The following table compares our aggregated forecast of Consumer Loan collection rates as of December 31, 2023, with the aggregated forecasts as of December 31, 2022, as of December 31, 2021, and at the time of assignment, segmented by year of assignment:

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

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Contractual repayments include both principal and interest.

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

Consumer Loans assigned in 2013 and 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.

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, 2021, 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 year ended December 31, 2023, forecasted collection rates improved for Consumer Loans assigned in 2018 and 2019, declined for Consumer Loans assigned in 2020 through 2022, and were generally consistent with expectations at the start of the period for all other assignment years presented.

For the year ended December 31, 2022, forecasted collection rates improved for Consumer Loans assigned in 2014, 2016, and 2017, 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 year ended December 31, 2021, forecasted collection rates improved for Consumer Loans assigned in 2017 through 2021 and were generally consistent with expectations at the start of the period for all other assignment years presented.

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

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Total $ (206.3) $ (59.7) $ 326.1

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

% change from forecast at beginning of period -2.3 % -0.7 % 3.4 %

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.

The below-average levels of Consumer Loan prepayments continued through the fourth quarter of 2023.

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 million, or 0.5%, and increased provision for credit losses by $71.3 million.

We have experienced increased levels of uncertainty associated with our estimate of the amount and timing of future net cash flows from our Loan portfolio since the beginning of 2020, with realized collections underperforming our expectations during the early stages of the COVID-19 pandemic, outperforming our expectations following the distribution of federal stimulus payments and enhanced unemployment benefits, and underperforming our expectations during the current economic environment.

For the period from January 1, 2020 through December 31, 2023, the cumulative change to our forecast of future net cash flows from our Loan portfolio has been an increase of $13.8 million, or 0.2%.

Forecasting collection rates accurately is challenging, so we have designed our business model to produce acceptable levels of profitability across our portfolio, even if Loan performance is less than forecasted in the aggregate.

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

Average Total Assignment Volume

Consumer Loan Assignment Year Consumer Loan (1) Advance (2) Initial Loan Term

(in months) Unit Volume Dollar Volume (2)

(in millions)

2014 $ 15,692 $ 7,492 47 223,998 $ 1,675.7

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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 December 31, 2022, as well as the forecasted collection rates and spread at the time of assignment.

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

The following table presents aggregate forecasted Consumer Loan collection rates, advance rates, and spreads (the forecasted collection rate less the advance rate), and the percentage of the forecasted collections that had been realized as of December 31, 2023, as well as forecasted collection rates and spreads 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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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 25.9% 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 the result of the performance of 2022 Consumer Loans, which performed worse than our initial estimates.

The following table compares our forecast of Consumer Loan collection rates as of December 31, 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 December 31, 2023 and the advance rate ranges from 15.3% to 24.0% 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 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 December 31, 2023 is primarily due to the underperformance 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 aggregate Consumer Loan collection rates as of December 31, 2023 with the forecasts at the time of assignment, for Dealer Loans and Purchased Loans separately:

Dealer Loans Purchased Loans

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Contractual repayments include both principal and interest.

The following table presents forecasted Consumer Loan collection rates, advance rates, and the spread (the forecasted collection rate less the advance rate) as of December 31, 2022 for Dealer Loans and Purchased Loans separately.

The following table presents aggregate forecasted Consumer Loan collection rates, advance rates, and spreads (the forecasted collection rate less the advance rate) as of December 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).

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

The spread on Dealer Loans decreased from 20.9% in 2021 to 19.4% in 2022, primarily as a result of the performance of the 2022 Consumer Loans in our Dealer Loan portfolio, which performed worse than our initial estimates by a greater margin than those assigned to us in 2021.

The spread on Purchased Loans decreased from 19.0% in 2021 to 17.3% in 2022 primarily as a result of the performance of the 2022 Consumer Loans in our Purchased Loan portfolio, which performed worse than our initial estimates, while the performance of the Consumer Loans in our Purchased Loan portfolio assigned during 2021 has exceeded our initial estimates.

Additionally, 2022 Consumer Loans in our Purchased Loan portfolio had a lower initial spread, primarily due to the advance rate increasing by a greater margin than the initial forecast on 2022 Consumer Loans in our Purchased Loan portfolio.

The spread as of December 31, 2023 on 2023 Dealer Loans was 21.6%, as compared to a spread of 15.6% 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 December 31, 2023 on 2023 Purchased Loans was 20.3%, as compared to a spread of 14.2% 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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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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Our pricing strategy is intended to maximize the amount of economic profit we generate, within the confines of capital and infrastructure constraints.

During 2022, unit and dollar volumes increased 4.4% and 14.5%, respectively, as the number of active Dealers increased 4.3% while average volume per active Dealer remained consistent with prior year.

During 2023, unit and dollar volumes increased 18.6% and 14.4%, respectively, as the number of active Dealers increased 19.1% while average volume per active Dealer decreased 0.4%.

Dollar volume increased less than unit volume in 2023 due to a decrease in the average advance paid, due to decreases in the average advance rate and the average size of Consumer Loans assigned.

Unit volume for 2023 was 10.9% less than unit volume for 2018, which was the highest unit volume in our history.

During 2022, unit and dollar volumes increased 4.4% and 14.5%, respectively, as the number of active Dealers increased 4.3% while average volume per active Dealer remained consistent with the prior year.

Dollar volume increased more than unit volume in 2022 due to an increase in the average advance paid per unit.

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The comparable 2021 period reflected a significant decline in unit volume, which we believe was 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.

During 2021, unit and dollar volumes decreased 21.4% and 13.0%, respectively, as the number of active Dealers declined 10.1% while average volume per active Dealer decreased 12.3%.

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

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

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

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

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The following is a discussion of our 2023 and 2022 results of operations and income statement data on a consolidated basis, including year-to-year comparisons between 2023 and 2022.

Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

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

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

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

Under the GAAP methodology we employ, which is known as the current expected credit loss model, or CECL, we are required to recognize:

• a significant provision for credit losses expense at the time of the Loan’s assignment to us for contractual net cash flows we do not expect to realize;

• finance charge revenue in subsequent periods that is significantly in excess of our expected yields.

Due to the GAAP treatment of contractual net cash flows we do not expect to realize at the time of loan assignment (i.e.

significant expense at the time of loan assignment, which is offset by higher revenue in subsequent periods), we do not believe the GAAP methodology we employ provides sufficient transparency into the economics of our business.

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

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Sales and marketing 91.7 75.6 16.1 21.3 %

Provision for credit losses 481.4 8.4 473.0 5,631.0 %

Total operating expenses 459.1 426.3 32.8 7.7 %

Provision for credit losses on forecast changes 413.7 137.7 276.0 200.4 %

Provision for credit losses on new Consumer Loan assignments 322.5 343.7 (21.2) -6.2 %

Total provision for credit losses 736.2 481.4 254.8 52.9 %

Interest 266.5 166.6 99.9 60.0 %

Provision for claims 70.7 46.4 24.3 52.4 %

Loss on extinguishment of debt 1.8 — 1.8 — %

Total costs and expenses 1,534.3 1,120.7 413.6 36.9 %

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Diluted 13,010,735 13,625,081 (614,346) -4.5 %

(1) Operating expenses $ 426.3 $ 383.7 $ 42.6 11.1 %

Finance Charges.

The decrease of $56.3 million, or 3.2%, was due to a decline in the average net Loans receivable balance, partially offset by an increase in the average yield on our Loan portfolio, as follows:

The increase of $69.1 million, or 4.1%, was primarily due to an increase in the average net Loans receivable balance, as follows:

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

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Average yield on our Loan portfolio 26.5 % 26.7 % -0.2 %

The following table summarizes the impact each component had on the overall decrease in finance charges for the year ended December 31, 2022:

The following table summarizes the impact each component had on the overall increase in finance charges for the year ended December 31, 2023:

(In millions)

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For the Year Ended December 31, 2023

Due to a decrease in the average net Loans receivable balance $ (99.8)

Due to an increase in the average yield 43.5

Total decrease in finance charges $ (56.3)

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 year ended December 31, 2022 increased as compared to the same period in 2021 primarily due to the adoption of CECL on January 1, 2020, which requires us to recognize finance charges on new Consumer Loan assignments using effective interest rates based on contractual future net cash flows, which are significantly in excess of our expected yields.

Due to an increase in the average net Loans receivable balance $ 84.6

Due to a decrease in the average yield (15.5)

Total increase in finance charges $ 69.1

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 $16.9 million, or 27.0%, 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 premium written per reinsured vehicle service contract in recent periods.

Other Income .

The increase of $30.3 million, or 57.1%, was primarily due to:

• A $20.4 million increase in ancillary product profit sharing income, primarily due to a decrease in average claim rates on GAP contracts and $5.9 million of income recognized in 2022 related to an inception-to-date adjustment to premium recognition timing based on our historical claims experience on GAP contracts.

• A $5.6 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 in 2022 for repossession activity that occurred from August 2020 through December 2021.

• A $5.4 million increase in interest income earned on restricted cash and cash equivalents primarily due to an increase in benchmark interest rates.

The decrease of $16.5 million, or 19.8%, was primarily due to:

• A $26.5 million decrease in ancillary product profit sharing income, primarily due to:

• Increases in average claim rates and volume of claims on GAP contracts.

• $5.9 million of income recognized in 2022 related to an inception-to-date adjustment to premium recognition timing based on our historical claims experience on GAP contracts.

• A $2.7 million decrease in remarketing fee income for fees charged to Dealers related to the repossession and remarketing of vehicles.

Remarketing fee income for the year ended December 31, 2022 included $3.1 million of fees charged to Dealers for repossession activity that occurred from August 2020 through December 2021.

• A $13.1 million increase in interest income due to increases in benchmark interest rates and the average restricted cash and cash equivalents balance.

Operating Expenses .

The increase of $32.8 million, or 7.7%, was primarily due to:

• An increase in salaries and wages expense of $43.9 million, or 20.1%, primarily due to:

▪ An increase of $32.2 million, excluding stock-based compensation expense, primarily related to an increase in the number of team members in our engineering department.

▪ An increase of $11.7 million in stock-based compensation expense, primarily related to an $11.5 million reversal of expense during 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 in sales and marketing expense of $10.3 million, or 15.8%, primarily due to a change in the compensation plan for our sales force in September 2021.

▪ A decrease in general and administrative expense of $11.6 million, or 11.6%, primarily due to a decrease in legal expenses.

Legal expenses during 2021 included a $27.2 million settlement with the Commonwealth of Massachusetts to settle and fully resolve claims asserted by the Commonwealth of Massachusetts against the Company, while legal expenses during 2022 included a $12.0 million settlement to settle and fully resolve a previously-disclosed putative class action lawsuit.

• An increase in salaries and wages expense of $18.2 million, or 6.9%, primarily due to 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.

▪ An increase in sales and marketing expense of $16.1 million, or 21.3%, 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.

Provision for Credit Losses .

The increase of $473.0 million, or 5,631.0%, was primarily due to an increase in provision for credit losses on forecast changes.

The increase of $254.8 million, or 52.9%, 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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Provision for Credit Losses 2023 2022 Change

New Consumer Loan assignments $ 343.7 $ 365.1 $ (21.4)

Forecast changes $ 413.7 $ 137.7 $ 276.0

New Consumer Loan assignments 322.5 343.7 (21.2)

Total $ 736.2 $ 481.4 $ 254.8

The decrease in provision for credit losses related to new Consumer Loan assignments was due to a decrease in the average provision for credit losses per Consumer Loan assignment primarily due to a decrease in Purchased Loans as a percentage of total unit volume, partially offset by a 4.4% increase in Consumer Loan assignment unit volume.

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

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

During 2023, we decreased our estimate of future net cash flows by $206.3 million, or 2.3%, 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.

The $206.3 million decrease in forecasted net cash flows during 2023 included the impact of an adjustment to our forecasting methodology during the second quarter of 2023, which, upon implementation, decreased our estimate of future net cash flows by $44.5 million, or 0.5%, and increased our provision for credit losses by $71.3 million.

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.

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

During 2022, we reduced our estimate of future net cash flows by $59.7 million, or 0.7%, to reflect a decline in Consumer Loan performance during the period.

During 2021, we increased our estimate of future net cash flows by $326.1 million, or 3.4%, to reflect improvements in Consumer Loan performance during the period.

The results for 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 $59.7 million decrease in forecasted net cash flows during 2022 included the impact of forecasting methodology changes implemented during the first quarter of 2022, 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 (as defined below under “Critical Accounting Estimates—Finance Charge Revenue & Allowance for Credit Losses”) 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 5 to the consolidated financial statements contained in Item 8 of this Form 10-K, which is incorporated herein by reference.

The decrease in provision for credit losses related to new Consumer Loan assignments was due to a 20.9% decrease in the average provision per new Consumer Loan assignment, partially offset by an 18.6% increase in Consumer Loan assignment unit volume.

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

The increase in interest expense of $99.9 million, or 60.0%, was primarily due to an increase in our average cost of debt, which was primarily a result of higher interest rates on recently-completed or extended secured financings and the repayment of older secured financings with lower interest rates, as follows:

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

2023 2022 Change

Interest expense $ 266.5 $ 166.6 $ 99.9

Average outstanding debt principal balance (1) 4,808.4 4,687.6 120.8

Average cost of debt 5.5 % 3.6 % 1.9 %

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

Provision for Claims.

The increase in provision for claims of $24.3 million, or 52.4%, was primarily due to increases in the size of our reinsurance portfolio and the average claim paid per reinsured vehicle service contract.

Provision for Income Taxes.

For the year ended December 31, 2022, the effective income tax rate increased to 24.7% from 24.0% for the year ended December 31, 2021.

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

The impact of non-deductible executive compensation expense on our effective income tax rate increased in magnitude from 2021 to 2022 due to a decrease in pre-tax income.

For the year ended December 31, 2023, the effective income tax rate decreased to 22.2% from 24.7% for the year ended December 31, 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 Item 8 of this Form 10-K, which is incorporated herein by reference.

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Expected future net cash flows for Purchased Loans are comprised of expected future collections on the assigned Consumer Loans.

Expected future collections are forecasted for each individual Consumer Loan based on the historical performance of Consumer Loans with similar characteristics, adjusted for recent trends in payment patterns and economic conditions.

Our forecast of expected future collections includes estimates for prepayments and post-contractual-term cash flows.

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The credit quality indicators considered in our model include attributes contained in the consumer’s credit bureau report, data contained in the consumer’s credit application, the structure of the proposed transaction, vehicle information, and other factors.

We continue to evaluate the expected collection rate of each Consumer Loan subsequent to assignment primarily through the monitoring of consumer payment behavior.

We continue to evaluate the expected collection rate for each Consumer Loan subsequent to assignment primarily through the monitoring of consumer payment behavior.

Our evaluation becomes more accurate as the Consumer Loans age, as we use actual performance data in our forecast.

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

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.

The below-average levels of Consumer Loan prepayments continued through the fourth quarter of 2023.

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 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.

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• $343.7 million provision for credit losses on new Consumer Loan assignments, which reduced consolidated net income by $264.6 million, or $19.42 per diluted share;

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

• $137.7 million provision for credit losses on forecast changes related to changes in the amount and timing of expected future net cash flows, which reduced consolidated net income by $106.0 million, or $7.78 per diluted share.

Variances in the amount and timing of future net cash flows from current estimates could materially impact earnings in future periods.

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

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

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

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

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

On 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 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.

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.

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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.

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%.

On November 3, 2022, we completed a $389.9 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 8.5% (including the initial purchasers’ fees and other costs), and it will revolve for 24 months, after which it will amortize based upon the cash flows on the contributed Loans.

On December 15, 2022, we completed a $200.0 million Term ABS financing, which was used to repay outstanding indebtedness.

The financing will bear interest at SOFR plus 235 basis points, and it will revolve for 36 months, after which it will amortize based upon the cash flows on the contributed Loans.

On December 27, 2022, we increased the financing amount on Warehouse Facility V from $125.0 million to $200.0 million and extended the date on which the facility will cease to revolve from December 18, 2023 to December 29, 2025.

The maturity of the facility was also extended from December 16, 2025 to December 27, 2027.

On August 4, 2023, we extended the date on which our $75.0 million Warehouse Facility VI will cease to revolve from September 30, 2024 to September 30, 2026.

On August 24, 2023, we completed a $400.0 million Term ABS financing, which was used to repay outstanding indebtedness and for general corporate purposes.

On September 21, 2023, we extended the date on which our $200.0 million Warehouse Facility VIII will cease to revolve from September 1, 2024 to September 21, 2026.

The interest rate on borrowings under the facility has been increased from SOFR plus 201.4 basis points to SOFR plus 225 basis points.

On December 27, 2022, we extended the $100.0 million Term ABS financing that we entered into on January 29, 2021 and to which we refer as Term ABS 2021-1.

Under the amendment effecting the extension, the date on which the financing will cease to revolve has been extended from February 15, 2023 to December 16, 2024.

The amendment also increased the interest rate under the financing from SOFR plus 208.5 basis points to SOFR plus 220 basis points.

Cash and cash equivalents decreased to $7.7 million as of December 31, 2022 from $23.3 million as of December 31, 2021.

On November 30, 2023, we completed a $200.0 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 8.6% (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 December 19, 2023, we issued $600.0 million of 9.250% senior notes due 2028 (the “2028 senior notes”).

We used a portion of the net proceeds from the 2028 senior notes to repurchase or redeem all of the $400.0 million outstanding principal amount of our 5.125% senior notes due 2024 (the “2024 senior notes”), of which $322.3 million was repurchased on December 19, 2023 and the remaining $77.7 million was redeemed on December 31, 2023.

We used the remaining net proceeds from the 2028 senior notes for general corporate purposes.

During the fourth quarter of 2023, we recognized a pre-tax loss on extinguishment of debt of $1.8 million related to the repurchase and redemption of the 2024 senior notes.

On December 21, 2023, we completed a $294.0 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 7.0% (including the initial purchasers’ fees and other costs), and it will revolve for 24 months, after which it will amortize based upon the cash flows on the underlying Loans.

On December 29, 2023, we extended the date on which our $300.0 million Warehouse Facility IV will cease to revolve from May 20, 2025 to December 29, 2026.

Cash and cash equivalents increased to $13.2 million as of December 31, 2023 from $7.7 million as of December 31, 2022.

As of December 31, 2023 and December 31, 2022, we had $1,505.8 million and $1,554.1 million, respectively, in unused and available lines of credit.

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We are also obligated to make interest payments at the applicable interest rates, as discussed in Note 9 to the consolidated financial statements contained in Item 8 of this Form 10-K, which is incorporated herein by reference.

Based on the actual principal amounts outstanding under our revolving secured line of credit, our Warehouse facilities, our Term ABS financings, and our senior notes as of December 31, 2022, the forecasted principal amounts outstanding on all other debt, and the actual interest rates in effect as of December 31, 2022, interest is expected to be approximately $164.5 million during 2023;

Based on the actual principal amounts outstanding under our revolving secured line of credit facility, our Warehouse facilities, our Term ABS financings, and our senior notes as of December 31, 2023, the forecasted principal amounts outstanding on all other debt, and the actual interest rates in effect as of December 31, 2023, interest is expected to be approximately $303.0 million during 2024;

$249.7 million during 2025;

and $219.4 million during 2026 and thereafter.

(2) We have contractual obligations to pay Dealer Holdback to our Dealers.

(2) We have contractual obligations to pay Dealer Holdback to Dealers.

Payments of Dealer Holdback are contingent upon the receipt of consumer payments and the repayment of advances.

The amounts presented represent our forecast as of December 31, 2023.

(3) A lease liability of $1.3 million is recognized within accounts payable and accrued liabilities in our consolidated balance sheets.

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

(3) A lease liability of $2.7 million is recognized within accounts payable and accrued liabilities in our consolidated balance sheet as of December 31, 2023.

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

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

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We manage such risk primarily by entering into interest rate cap agreements.

As of December 31, 2022, we had $30.9 million of floating rate debt outstanding on our revolving secured line of credit, without interest rate protection.

For every 100-basis-point increase in interest rates on our revolving secured line of credit, annual after-tax earnings would decrease by approximately $0.2 million, assuming we maintain a level amount of floating rate debt.

As of December 31, 2022, we had interest rate cap agreements outstanding to manage the interest rate risk on Warehouse Facility II, Warehouse Facility IV, Warehouse Facility V and Warehouse Facility VIII.

As of December 31, 2023, we had $79.2 million of floating rate debt outstanding under our revolving secured lines of credit, without interest rate protection.

For every 100-basis-point increase in interest rates on our revolving secured lines of credit, annual after-tax earnings would decrease by approximately $0.6 million, assuming we maintain a level amount of floating rate debt.

As of December 31, 2023, we had interest rate cap agreements outstanding to manage the interest rate risk on Warehouse Facility IV, Warehouse Facility V, and Warehouse Facility VIII.

However, as of December 31, 2023, there was no floating rate debt outstanding under these facilities.

As of December 31, 2022, we did not have a balance outstanding under Warehouse Facility VI, which does not have interest rate protection.

As of December 31, 2023, we did not have a balance outstanding under Warehouse Facility II and Warehouse Facility VI, which do not have interest rate protection.

As of December 31, 2023, we had $100.0 million in floating rate debt outstanding under Term ABS 2021-1, which was covered by an interest rate cap with a cap rate of 5.46% on the underlying benchmark rate.

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

• Troubled Debt Restructurings and Vintage Disclosures.

• Disclosure Improvements:

Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative.

• Improvements to Reportable Segment Disclosures

• Improvements to Income Tax Disclosures

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-K

Item 7. Management’s Discussion and Analysis