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Item 7. Management’s Discussion and Analysis

2024-03-15 compared with 2023-03-15 · 234 added, 353 removed, 685 unchanged (46% of the section changed)

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of Financial Condition and Results of Operations

The following discussion and

analysis should be read in conjunction with our consolidated financial statements and notes thereto and other information included or

incorporated by reference herein.

The following discussion

of our financial condition and results of operations for the years ended December 31, 2023 and 2022 should be read in conjunction with

our consolidated financial statements and the notes to those statements that are included elsewhere in this Annual Report on Form 10-K.

Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans,

objectives, expectations and intentions.

Actual results and the timing of events could differ materially from those anticipated in these

forward-looking statements as a result of a number of factors.

We use words such as anticipate, estimate, plan, project, continuing, ongoing,

expect, believe, intend, may, will, should, could, and similar expressions to identify forward-looking statements.

See “ Cautionary Note Regarding Forward-Looking Statements .”

We are a specialty finance

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In addition to purchasing installment purchase contracts

directly from dealers, we also originate vehicle purchase money loans by lending directly to consumers and have (i) acquired installment

purchase contracts in four merger and acquisition transactions, and (ii) purchased immaterial amounts of vehicle purchase money loans

from non-affiliated lenders.

directly from dealers, we also have (i) originated vehicle purchase money loans by lending directly to consumers and have (ii) acquired

installment purchase contracts in four merger and acquisition transactions, and (iii) purchased immaterial amounts of vehicle purchase

money loans from non-affiliated lenders.

In this report, we refer to all of such contracts and loans as “automobile contracts.”

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our operations in March 1991.

From inception through December 31, 2022, we have originated a total of approximately $20.0 billion of automobile

contracts, primarily by purchasing retail installment sales contracts from dealers, and to a lesser degree, by originating loans secured

by automobiles directly with consumers.

In addition, we acquired a total of approximately $822.3 million of automobile contracts in mergers

and acquisitions in 2002, 2003, 2004 and 2011.

Contract purchase volumes and managed portfolio levels for the five years ended December

31, 2022 are shown in the table below.

From inception through December 31, 2023, we have purchased a total of approximately $21.3 billion of automobile

contracts from dealers.

In addition, we acquired a total of approximately $822.3 million of automobile contracts in mergers and acquisitions

in 2002, 2003, 2004 and 2011.

Contract purchase volumes and managed portfolio levels for the five years ended December 31, 2023 are shown

in the table below.

Managed portfolio comprises both contracts we owned and those we were servicing for third parties.

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$ in thousands

Contracts Purchased

Managed Portfolio

at Period End

Contracts Purchased in Period

Managed Portfolio at Period End

Our principal executive offices

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Credit and underwriting

functions are performed primarily in our California branch with certain of these functions also performed in our Florida and Nevada branches.

functions are performed primarily in our California branch with certain of these functions also performed in our Florida, Nevada, and

Virginia branches.

We service our automobile contracts from our California, Nevada, Virginia, Florida, and Illinois branches.

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purchase of the pool of contracts from us.

Coronavirus Pandemic

In December 2019, a new strain

of coronavirus (the “COVID-19 virus”) originated in Wuhan, China.

Since its discovery, the COVID-19 virus has spread throughout

the world, and the outbreak has been declared to be a pandemic by the World Health Organization.

We refer from time to time in this report

to the outbreak and spread of the COVID-19 virus as “the pandemic.” In March 2020 at the outset of the pandemic we complied

with government mandated shutdown orders in the five locations we operate by arranging for many of our staff to work from home and invoking

various safety protocols for workers who remained in our offices.

In April 2020, we laid off approximately 100 workers, or about 10% of

our workforce, throughout our offices because of significant reductions in new contract originations.

As of December 31, 2022, most of

our staff were working without a significant impact from the pandemic.

Securitization and Warehouse Credit Facilities

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in the table below:

Recent Asset-Backed Term Securitizations

Recent Asset-Backed Securitizations

$ in thousands

Number of Term Securitizations

Amount of Receivables

Generally, prior to a securitization

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$200 million.

Prior to the expiration of the revolving period in January 2024, the revolving period was extended to March 31, 2024.

We previously had a third facility.

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our liquidity and results of operations.

Critical Accounting Estimates

Critical Accounting Policies

We believe that our accounting

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Finance Receivables Measured at Fair Value

Effective January 1, 2018, we adopted the fair

value method of accounting for finance receivables acquired on or after that date.

For each finance receivable acquired after 2017, we

consider the price paid on the purchase date as the fair value for such receivable.

We estimate the cash to be received in the future

with respect to such receivables, based on our experience with similar receivables acquired in the past.

We then compute the internal

rate of return that results in the present value of those estimated cash receipts being equal to the purchase date fair value.

we recognize interest income on such receivables on a level yield basis using that internal rate of return as the applicable interest

Cash received with respect to such receivables is applied first against such interest income, and then to reduce the recorded value

of the receivables.

We re-evaluate the fair value of such receivables

at the close of each measurement period.

If the re-evaluation were to yield a value materially different from the recorded value, an adjustment

would be required.

Results for the year ended December 31, 2022 included a $15.3 million mark to the carrying value of the portion of

the receivables portfolio accounted for at fair value.

The mark-up was the result of lower than expected losses during the period as our

previous estimates for higher losses due to the pandemic had not materialized.

In the fourth quarter of 2022, our re-evaluation

of the fair values of these receivables resulted in a positive mark for certain older receivables and a negative mark to the fair values

of newer receivables that largely offset each other.

As a result, on a net basis, no mark was taken in the fourth quarter of 2022.

Effective January 1, 2018,

we adopted the fair value method of accounting for finance receivables acquired on or after that date.

For each finance receivable acquired

after 2017, we consider the price paid on the purchase date as the fair value for such receivable.

We estimate the cash to be received

in the future with respect to such receivables, based on our experience with similar receivables acquired in the past.

We then compute

the internal rate of return that results in the present value of those estimated cash receipts being equal to the purchase date fair value.

Thereafter, we recognize interest income on such receivables on a level yield basis using that internal rate of return as the applicable

interest rate.

Cash received with respect to such receivables is applied first against such interest income, and then to reduce the recorded

value of the receivables.

We re-evaluate the fair value

of such receivables at the close of each measurement period.

If the re-evaluation were to yield a value materially different from the

recorded value, an adjustment, which we also refer to as a mark, would be required.

Results for the years ended December 31, 2023 and

2022 include marks of $12.0 and $15.3 million, respectively, to the carrying value of the portion of the receivables portfolio accounted

for at fair value.

The marks are estimates based on our evaluation of the appropriate fair value and future earnings rate of existing

receivables compared to recently acquired receivables and increases or decreases in our estimates of future net losses.

Anticipated credit losses are included in our

estimation of cash to be received with respect to receivables.

Because such credit losses are included in our computation of the

appropriate level yield, we do not thereafter make periodic provision for credit losses, as our best estimate of the lifetime aggregate

of credit losses is included in that initial computation.

Also, because we include anticipated credit losses in our computation of the

level yield, the computed level yield is materially lower than the average contractual rate applicable to the receivables.

initial recorded value is fixed as the price we pay for the receivable, rather than as the contractual principal balance, we do not record

acquisition fees as an amortizing asset related to the receivables, nor do we capitalize costs of acquiring the receivables.

recognize the costs of acquisition as expenses in the period incurred.

Allowance for Finance Credit Losses

In order to estimate an appropriate

allowance for losses incurred on finance receivables, we use a loss allowance methodology commonly referred to as " static

pooling, " which stratifies our finance receivable portfolio into

separately identified pools based on the period of origination.

Using analytical and formula driven techniques, we estimate an allowance

for finance credit losses, which we believe is adequate for probable incurred credit losses that can be reasonably estimated in our portfolio

of automobile contracts.

Net losses incurred on finance receivables are charged to the allowance.

We evaluate the adequacy of the allowance

by examining current delinquencies, the characteristics of the portfolio, prospective liquidation values of the underlying collateral

and general economic and market conditions.

As circumstances change, our level of provisioning and/or allowance may change as well.

acquired after 2017, are accounted for using fair value and will have no allowance for finance credit losses in accordance with the fair

value method of accounting for finance receivables.

Broad economic factors such

as recession and significant changes in unemployment levels influence the credit performance of our portfolio, as does the weighted average

age of the receivables at any given time.

Our internal credit performance data consistently show that new receivables have lower levels

of delinquency and losses early in their lives, with delinquencies increasing throughout their lives and incremental losses gradually

increasing to a peak around 18 months, after which they gradually decrease.

The credit performance of

our portfolio is also significantly influenced by our underwriting guidelines and credit criteria we use when evaluating contracts for

purchase from dealers.

We regularly evaluate our portfolio credit performance and modify our purchase criteria to maximize the credit

performance of our portfolio, while maintaining competitive programs and levels of service for our dealers.

We generally do not lower

the contractual interest rate or waive or forgive principal when our borrowers incur financial difficulty on either a temporary or permanent

An exception to this policy is when a court order mandates the terms of the contract to be modified, such as in a Chapter 13 bankruptcy

In such cases, which represent an immaterial portion of our portfolio of finance receivables, we have estimated the amount

of impairment that results from such modification and established an appropriate allowance within our Allowance for Finance Credit Losses.

January 1, 2020, the Company adopted Accounting Standards Codification ("ASC") 326, which changes the criteria under which credit

losses on financial instruments (such as the Company’s finance receivables) are measured.

ASC 326 introduced a new credit reserving

model known as the Current Expected Credit Loss (“CECL”) model, which replaces the incurred loss impairment methodology previously

used under U.S.

GAAP with a methodology that records currently the expected lifetime credit losses on financial instruments.

of CECL required that we establish an allowance for the remaining expected lifetime credit losses on the portion of the Company’s

receivable portfolio for which the Company was not already using fair value accounting.

We refer to that portion, which is those receivables

that were originated prior to January 2018, as our “legacy portfolio”.

To comply with CECL, the Company recorded an addition

to its allowance for finance credit losses of $127.0 million.

In accordance with the fair value accounting standards, credit losses are

included in our computation of the appropriate level yield, therefore we do not thereafter make periodic provision for credit losses,

as our best estimate of the lifetime aggregate of credit losses is included in that initial computation.

Also, because we include anticipated

credit losses in our computation of the level yield, the computed level yield is materially lower than the average contractual rate applicable

to the receivables.

Because our initial recorded value is fixed as the price we pay for the receivable, rather than as the contractual

principal balance, we do not record acquisition fees as an amortizing asset related to the receivables, nor do we capitalize costs of

acquiring the receivables.

Rather we recognize the costs of acquisition as expenses in the period incurred.

Term Securitizations

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Factors discussed under “Risk Factors,”

and in particular under the subheading "Risk Factors -- Forward-Looking Statements" may affect whether such projections prove

to be correct.

and under the heading “Cautionary Note Regarding Forward-Looking Statements.” may affect whether such projections prove to

We recognize interest and

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Subsequently, we successfully

completed securitizations in June and September 2020 and four securitizations in each of 2021 and 2022.

completed securitizations in June and September 2020, and then on a regular quarterly schedule from January 2021 through January 2024.

Financial Covenants

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balance of finance receivables measured at fair value.

In addition, mark ups to the finance receivables measured at fair value also contributed

to the increase in revenues during the year.

Revenues for the year ended December 31, 2022 include a $15.3 million mark up to the recorded

value of the finance receivables measured at fair value.

The marks are estimates based on our evaluation of the appropriate fair value

and future earnings rate of existing receivables compared to recently acquired receivables and increases or decreases in our estimates

of future net losses.

Results for the nine-month period ended September

30, 2022 included the $15.3 million mark to the carrying value of the portion of the receivables portfolio accounted for at fair value.

The mark-up was the result of lower than expected losses during the period as our previous estimates for higher losses due to the pandemic

had not materialized.

In the fourth quarter of 2022, our re-evaluation of the fair values of these receivables resulted in a positive

mark for certain older receivables and a negative mark to the fair values of newer receivables that largely offset each other.

on a net basis, no mark was taken in the fourth quarter of 2022.

Revenues for the prior year period include a $4.4 million mark down to

the fair value portfolio.

Revenues for the year ended

December 31, 2021 include a $4.4 million mark down to the fair value portfolio.

Revenues for the years ended December 31, 2023 and 2022 include fair value marks

of $12.0 and $15.3 million, respectively, to the carrying value of the portion of the receivables portfolio accounted for at fair value.

The marks are estimates based on our evaluation of the appropriate fair value and future earnings rate of existing receivables compared

to recently acquired receivables and increases or decreases in our estimates of future net losses.

For the year ended December 31, 2023,

our re-evaluation of the fair values of these receivables resulted in a mark up for certain older receivables and a mark down to the fair

values of newer receivables.

The fair value mark up on the older receivables exceeded the mark down to the newer receivables resulting

in a net mark up of $12.0 million.

Interest income for the year

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The primary reason

for the increase in interest income is the 32.5% increase in the average balance of finance receivables measured at fair value over the

prior year period.

The table below shows the outstanding and average balances of our portfolio held by consolidated subsidiaries for the

years ended December 31, 2022 and 2021:

for the increase in interest income is the 14.7% increase in the average balance of our loan portfolio over the prior year period.

interest yield on our total loan portfolio decreased from 12.0% in the prior year period to 11.3% in the current year period.

reason for the decrease in total interest yield is that the receivables measured at fair value makes up a larger portion of our total

loan portfolio in the current year period.

The interest yield on receivables measured at fair value is calculated taking into account

expected losses and is therefore less than the yield on other finance receivables.

The table below shows the average balance and interest

yield of our loan portfolio for the years ended December 31, 2023 and 2022:

Year Ended December 31,

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Interest Earning Assets

Finance receivables

Finance receivables measured at fair value

Loan portfolio

Other income was $10.8 million

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$290.9 million for the year ended December 31, 2023, compared to $213.5 million for the prior year, an increase of $77.4 million, or 36.3%.

The increase is primarily due to increases in interest expense, sales expense, employee costs and general and administrative expenses.

Reductions in provisions for credit losses offset some of the increase in operating expenses.

The increase is primarily due to increases in interest expense and general and administrative expenses.

Employee costs increased by

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expense represented 50.4% of total operating expenses in 2023.

The primary reason for the increase in interest expense is the increase

in interest expense on our warehouse lines of credit and securitization trust debt.

Interest on securitization trust

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trust debt increased 15.5% to $2,333.5 million for the year ended December 31, 2023 compared to $2,020.0 million for the year ended December

The blended interest rates on new term securitizations have increased in 2022 after decreasing in 2021.

For any particular quarterly

securitization transaction, the blended cost of funds is ultimately the result of many factors including the market interest rates for

benchmark swaps of various maturities against which our bonds are priced and the margin over those benchmarks that investors are willing

to accept, which in turn, is influenced by investor demand for our bonds at the time of the securitization.

These and other factors have

resulted in fluctuations in our securitization trust debt interest costs.

The blended interest rates of our recent securitizations are

summarized in the table below:

The annualized average rate on our securitization trust debt was 5.2% for the year ended December 31, 2023 compared to 3.5%

in the prior year period.

The blended interest rates on new term securitizations have been increasing since 2022.

For each quarterly securitization

transaction, the blended cost of funds is ultimately the result of many factors including the market interest rates for benchmark swaps

of various maturities against which our bonds are priced and the margin over those benchmarks that investors are willing to accept, which

in turn, is influenced by investor demand for our bonds at the time of the securitization.

These and other factors have resulted in fluctuations

in our securitization trust debt interest costs.

The blended interest rates of our recent securitizations are summarized in the table

Blended Cost of Funds on Recent Asset-Backed Term Securitizations

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September 2020

The annualized average rate

on our securitization trust debt was 3.5% for the years ended December 31, 2022 and 2021.

The annualized average rate is influenced by

the manner in which the underlying securitization trust bonds are repaid.

The rate tends to increase over time on any particular securitization

since the structures of our securitization trusts generally provide for sequential repayment of the shorter term, lower interest rate

bonds before the longer term, higher interest rate bonds.

Interest expense on warehouse

lines of credit was $19.2 million for the year ended December 31, 2023 compared to $10.3 million in the prior year.

Lower rates were offset

by higher utilization of our credit lines during the year compared to last year.

The average balance of our warehouse debt was $130.1

million during 2022 compared to $51.3 million in 2021.

The increase was due

to higher rates and the higher utilization of our credit lines during 2023 compared to 2022.

The average balance of our warehouse debt

was $181.7 million during 2023 compared to $130.1 million in 2022.

Interest expense on residual

interest financing was $4.2 million in the year ended December 31, 2022 compared to $3.8 million in the prior year as the average balance

has increased.

interest financing was $4.2 million for each of the years ended December 31, 2023 and 2022.

Interest expense on our subordinated

renewable notes decreased by $297,000, or 11.3%, for the year ended December 31, 2022 compared to the prior year.

The average balance

of the notes increased from $25.3 million in the prior year to $26.8 million for the year ended December 31, 2022.

The average interest

rate on our subordinated notes decreased to 8.7% for the year ended December 31, 2022 from 10.5% for the year ended December 31, 2021.

renewable notes was $1.8 million in 2023 compared to $2.3 million in the prior year.

The average balance of the notes decreased from $26.8

million in the prior year to $20.9 million for the year ended December 31, 2023.

The average interest rate on our subordinated notes was

8.7% for the both years.

The following table presents

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(Dollars in thousands)

Average Balance (1)

Annualized Average Yield/Rate

Average Balance (1)

Annualized Average Yield/Rate

Interest Earning Assets

Finance receivables gross (2)

Finance receivables at fair value

Loan portfolio

Interest Bearing Liabilities

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Ratio of average interest earning assets to average interest bearing liabilities

(1) Average balances are based on month end balances except for warehouse lines of credit, which are based on daily balances.

(1) Average balances are

based on month end balances except for warehouse lines of credit, which are based on daily balances.

(2) Net of deferred fees and direct costs.

(3) Net interest income divided by average interest earning assets.

(3) Net interest income divided by average interest earning

Year Ended December 31, 2023

Compared to December 31, 2022

Change Due to Volume

(In thousands)

Interest Earning Assets

Finance receivables gross

Finance receivables at fair value

Loan portfolio

Interest Bearing Liabilities

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Net interest income/spread

The annualized yield on our finance receivables

was 12.0% for 2022 compared to 12.4% in 2021.

The interest yield on receivables measured at fair value is reduced to take account of expected

losses and is therefore less than the yield on other finance receivables.

The average balance of these fair value receivables was $2,388.2

million for the year ended December 31, 2022 compared to $1,802.6 million in the prior year period.

Effective January 1, 2020,

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To comply with CECL, the Company recorded

an addition to its allowance for finance credit losses of $127.0 million.

In accordance with the rules for adopting CECL, the offset to

the addition to the allowance for finance credit losses was a tax affected reduction to retained earnings using the modified retrospective

an addition to its allowance for finance credit losses of $127.0 million in 2020.

In accordance with the rules for adopting CECL, the

offset to the addition to the allowance for finance credit losses was a tax affected reduction to retained earnings using the modified

retrospective method.

For the year ended December 31, 2023, we recorded

a reduction to provision for credit losses on finance receivables in the amount of $28.1 million compared to $14.6 million in 2021.

reserve decreases were primarily due to improved credit performance for these

The allowance applies only to our finance receivables originated through December 2017, which we refer to as our legacy portfolio.

Finance receivables that we have originated since January 2018 are accounted for at fair value.

Under the fair value method of accounting,

we recognize interest income net of expected credit losses.

Thus, no provision for credit loss expense is recorded for finance receivables

measured at fair value.

a reduction to provision for credit losses on finance receivables in the amount of $22.3 million.

In the prior year period, we recorded

similar reductions to provision for credit losses in the amount of $28.1 million.

The reserve decreases were primarily due to better than

expected credit performance for these receivables.

The allowance applies only to our finance receivables originated through December 2017,

which we refer to as our legacy portfolio.

Finance receivables that we have originated since January 2018 are accounted for at fair

Under the fair value method of accounting, we recognize interest income net of expected credit losses.

Thus, no provision for credit

loss expense is recorded for finance receivables measured at fair value.

Sales expense consists primarily

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based on volume of contract purchases and sales of ancillary products and services that we offer our dealers.

Sales expense increased

Sales expense decreased

by $1.8 million to $21.2 million during the year ended December 31, 2023 and represented 7.3% of total operating expenses.

$1,357.8 million of new contracts during the year ended December 31, 2023 compared to $1,854.4 million in the prior year period.

Occupancy expenses decreased

by $180,000 or 2.3%, to $7.5 million compared to $7.7 million in the previous year and represented 3.5% of total operating expenses.

Occupancy expenses were $6.4

million in 2023 which is down from $7.5 million in 2022.

Depreciation and amortization

expenses decreased by $57,000 or 3.4%, to $1.6 million compared to $1.7 million in the previous year and represented 0.8% of total operating

expenses decreased to $847,000 compared to $1.6 million in the prior year.

For the year ended December

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In the prior period, our income tax

expense was $18.2 million, representing a 28% effective tax rate.

expense was $30.2 million, also representing a 26% effective tax rate.

Comparison of Operating Results for the year ended December 31,

2022 with the year ended December 31, 2021

the year ended December 31, 2021, our revenues were $267.8 million, a decrease of $3.4 million, or 1.2%, from the prior year revenues

of $271.2 million.

The primary reason for the decrease in revenues is a decrease in interest income.

Interest income for the year ended

December 31, 2021 decreased $28.7 million, or 9.7%, to $266.3 million from $295.0 million in the prior year.

The primary reason for the

decrease in interest income is the continued runoff of our legacy portfolio of finance receivables originated prior to January 2018, which

accrued interest at an average of 20.2%, which is offset only in part by the increase in our portfolio of receivables measured at fair

value, which are those originated since January 2018.

The interest yield on receivables measured at fair value is reduced to take account

of expected losses and is therefore less than the yield on other finance receivables.

The table below shows the outstanding and average

balances of our portfolio held by consolidated subsidiaries for the year months ended December 31, 2021 and 2020:

During the year ended

December 31, 2022, our revenues were $329.7 million, an increase of $61.9 million, or 23.1%, from the prior year revenues of $267.8 million.

The primary reason for the increase in revenues is the increase in interest income resulting from the increase in the average outstanding

balance of finance receivables measured at fair value.

In addition, mark ups to the finance receivables measured at fair value also contributed

to the increase in revenues during the year.

Revenues for the year ended December 31, 2022 include a $15.3 million mark up to the recorded

value of the finance receivables measured at fair value.

The marks are estimates based on our evaluation of the appropriate fair value

and future earnings rate of existing receivables compared to recently acquired receivables and increases or decreases in our estimates

of future net losses.

Results for the nine-month period ended September

30, 2022 included the $15.3 million mark to the carrying value of the portion of the receivables portfolio accounted for at fair value.

The mark-up was the result of lower than expected losses during the period as our previous estimates for higher losses due to the pandemic

had not materialized.

In the fourth quarter of 2022, our re-evaluation of the fair values of these receivables resulted in a positive

mark for certain older receivables and a negative mark to the fair values of newer receivables that largely offset each other.

on a net basis, no mark was taken in the fourth quarter of 2022.

Revenues for the prior year period include a $4.4 million mark down to

the fair value portfolio.

Revenues for the year ended

December 31, 2021 include a $4.4 million mark down to the fair value portfolio.

Interest income for the year

ended December 31, 2022 increased $39.0 million, or 14.6%, to $305.2 million from $266.2 million in the prior year.

The primary reason

for the increase in interest income is the 32.5% increase in the average balance of finance receivables measured at fair value over the

prior year period.

The table below shows the outstanding and average balances of our portfolio held by consolidated subsidiaries for the

years ended December 31, 2022 and 2021:

Year Ended December 31,

(Dollars in thousands)

Average Balance

Interest Earning Assets

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Finance receivables measured at fair value

Revenues for the year ended December 31, 2021 and 2020 are net of mark downs

of $4.4 million and $29.5 million, respectively, to the recorded value of the finance receivables measured at fair value.

The mark down

is an estimate based on our evaluation of the appropriate fair value and future earnings rate of existing receivables compared to recently

acquired receivables and our assessment of potential additional future net losses arising from the pandemic.

Other income was $9.2 million

for the year ended December 31, 2022 compared to $6.0 million for the year ended December 31, 2021.

This 54.1% increase was primarily

driven by the increase in origination and servicing fees we earned from third party receivables that we began originating in May 2021.

These fees were $6.8 million for the year ended December 31, 2022 and $1.3 million in the prior year period.

Our operating expenses

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Total operating expenses were

$202.1 million for the year ended December 31, 2021, compared to $251.0 million for the prior year, a decrease of $49.0 million, or 19.5%.

The decrease is primarily due to a decreases in interest expense and provisions for credit losses.

$213.5 million for the year ended December 31, 2021, compared to $202.1 million for the prior year, an increase of $11.5 million, or 5.7%.

The increase is primarily due to increases in interest expense, sales expense, employee costs and general and administrative expenses.

Reductions in provisions for credit losses offset some of the increase in operating expenses.

Employee costs increased by

$336,000 or 0.4%, to $80.5 million during the year ended December 31, 2021, representing 39.9% of total operating expenses, from $80.2

million for the prior year, or 31.9% of total operating expenses.

Employee costs for 2021 include approximately $8.0 million for the establishment

of a bonus pool for a segment of employees we classify as Managers.

$3.7 million or 4.7%, to $84.3 million during the year ended December 31, 2022, representing 39.5% of total operating expenses.

costs were $80.5 million in the prior year, or 39.9% of total operating expenses.

The table below summarizes our

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Number of Originations staff

Number of Marketing staff

Number of Sales staff

Number of Servicing staff

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Interest expense for the year

ended December 31, 2021 decreased by $26.1 million to $75.2 million, or 25.8%, compared to $101.3 million in the previous year.

ended December 31, 2022 increased by $12.3 million to $87.5 million, or 16.3%, compared to $75.2 million in the previous year.

expense represented 41.0% of total operating expenses in 2022.

The primary reason for the decrease in interest expense is the decrease

in securitization trust debt interest.

The primary reason for the increase in interest expense is the increase

in interest expense on our warehouse lines of credit and securitization trust debt.

Interest on securitization trust

debt decreased by $23.6 million, or 26.9%, for the year ended December 31, 2021 compared to the prior year.

debt increased by $6.2 million, or 9.7%, for the year ended December 31, 2022 compared to the prior year.

The average balance of securitization

trust debt decreased 9.8% to $1,819.9 million for the year ended December 31, 2021 compared to $2,017.2 million for the year ended December

The blended interest rates on new term securitizations have generally decreased since 2019 and have stayed relatively low in

2021 despite trending upward throughout the year.

For any particular quarterly securitization transaction, the blended cost of funds is

ultimately the result of many factors including the market interest rates for benchmark swaps of various maturities against which our

bonds are priced and the margin over those benchmarks that investors are willing to accept, which in turn, is influenced by investor demand

for our bonds at the time of the securitization.

These and other factors have resulted in fluctuations in our securitization trust debt

interest costs.

The blended interest rates of our recent securitizations are summarized in the table below:

trust debt increased 11.0% to $2,020.0 million for the year ended December 31, 2022 compared to $1,819.9 million for the year ended December

The blended interest rates on new term securitizations have increased in 2022 after decreasing in 2021.

For any particular quarterly

securitization transaction, the blended cost of funds is ultimately the result of many factors including the market interest rates for

benchmark swaps of various maturities against which our bonds are priced and the margin over those benchmarks that investors are willing

to accept, which in turn, is influenced by investor demand for our bonds at the time of the securitization.

These and other factors have

resulted in fluctuations in our securitization trust debt interest costs.

The blended interest rates of our recent securitizations are

summarized in the table below:

Blended Cost of Funds on Recent Asset-Backed Term Securitizations

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The annualized average rate

on our securitization trust debt was 3.5% for the year ended December 31, 2021 compared with 4.4% for 2020.

The annualized average rate

is influenced by the manner in which the underlying securitization trust bonds are repaid.

The rate tends to increase over time on any

particular securitization since the structures of our securitization trusts generally provide for sequential repayment of the shorter

term, lower interest rate bonds before the longer term, higher interest rate bonds.

on our securitization trust debt was 3.5% for the years ended December 31, 2022 and 2021.

The annualized average rate is influenced by

the manner in which the underlying securitization trust bonds are repaid.

The rate tends to increase over time on any particular securitization

since the structures of our securitization trusts generally provide for sequential repayment of the shorter term, lower interest rate

bonds before the longer term, higher interest rate bonds.

Interest expense on warehouse

lines of credit decreased by $3.2 million, or 42.1% for the year ended December 31, 2021 compared to the prior year.

The decrease was

primarily due to the lower utilization of our credit lines during the year.

The average balance of our warehouse debt was $51.3 million

during 2021 compared to $92.5 million in 2020.

lines of credit was $10.3 million for the year ended December 31, 2022 compared to $4.4 million in the prior year.

Lower rates were offset

by higher utilization of our credit lines during the year compared to last year.

The average balance of our warehouse debt was $130.1

million during 2022 compared to $51.3 million in 2021.

Interest expense on residual

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Interest expense on our subordinated

renewable notes increased by $466,000, or 21.4%, for the year ended December 31, 2021 compared to the prior year.

renewable notes decreased by $297,000, or 11.3%, for the year ended December 31, 2022 compared to the prior year.

The average balance

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Interest Earning Assets

Finance receivables gross (2)

Finance receivables at fair value

Loan portfolio

Interest Bearing Liabilities

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Ratio of average interest earning assets to average interest bearing liabilities

(1) Average balances are based on month end balances except for warehouse lines of credit, which are based on daily balances.

(1) Average balances are based on month end

balances except for warehouse lines of credit, which are based on daily balances.

(2) Net of deferred fees and direct costs.

(3) Net interest income divided by average interest earning assets.

(3) Net interest income divided by average interest earning

Year Ended December 31, 2022

Compared to December 31, 2021

Change Due to Volume

(In thousands)

Interest Earning Assets

Finance receivables gross

Finance receivables at fair value

Loan portfolio

Interest Bearing Liabilities

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Net interest income/spread

The reduction in the annualized yield on our finance

receivables for the year ended December 31, 2021 compared to the prior year period is the result of the lower interest yield on the receivables

measured at fair value.

The interest yield on receivables measured at fair value is reduced to take account of expected losses and is

therefore less than the yield on other finance receivables.

The average balance of these receivables was $1,802.6 million for the twelve

months ended December 31, 2021 compared to $1,631.5 million in the prior year period.

The annualized yield on our finance receivables

was 12.0% for 2022 compared to 12.4% in 2021.

The interest yield on receivables measured at fair value is reduced to take account of expected

losses and is therefore less than the yield on other finance receivables.

The average balance of these fair value receivables was $2,388.2

million for the year ended December 31, 2022 compared to $1,802.6 million in the prior year period.

Effective January 1, 2020,

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For the year ended December 31, 2022, we recorded

a reduction to provision for credit losses on finance receivables in the amount of $14.6 million.

The reserve decrease was primarily due

to a decrease in lifetime expected credit losses resulting from improved credit performance.

In the prior year period, we recorded an

increase to provision for credit losses for $14.1 million.

That provision represented our estimate in 2020 of additional forecasted losses

that might be incurred as a result of the pandemic on our portfolio of finance receivables.

Such losses were not considered in our initial

estimate of remaining lifetime losses that we recorded upon our adoption of CECL in January 2020.

The allowance applies only to

our finance receivables originated through December 2017, which we refer to as our legacy portfolio.

Finance receivables that we

have originated since January 2018 are accounted for at fair value.

Under the fair value method of accounting, we recognize interest income

net of expected credit losses.

a reduction to provision for credit losses on finance receivables in the amount of $28.1 million compared to $14.6 million in 2021.

reserve decreases were primarily due to improved credit performance for these receivables.

The allowance applies only to our finance receivables

originated through December 2017, which we refer to as our legacy portfolio.

Finance receivables that we have originated since January

2018 are accounted for at fair value.

Under the fair value method of accounting, we recognize interest income net of expected credit losses.

Thus, no provision for credit loss expense is recorded for finance receivables measured at fair value.

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Our sales representatives earn a salary plus commissions

based on volume of contract purchases and sales of ancillary products and services that we offer our dealers, such as training programs,

internet lead sales, and direct mail products.

Sales expense increased by $2.7 million to $16.9 million during the year ended December

31, 2021 and represented 8.4% of total operating expenses.

We purchased $1,146.3 million of new contracts during the year ended December

31, 2021 compared to $742.6 million in the prior year period.

In our second quarter of 2020, we experienced a significant reduction in

contract purchases due to the pandemic and partial shutdown of the economy.

Since then, our contract purchase volumes have gradually increased

to pre-pandemic levels.

Occupancy expenses increased

based on volume of contract purchases and sales of ancillary products and services that we offer our dealers.

Sales expense increased

by $6.2 million to $23.0 million during the year ended December 31, 2022 and represented 10.8% of total operating expenses.

$1,854.4 million of new contracts during the year ended December 31, 2022 compared to $1,146.3 million in the prior year period.

Occupancy expenses decreased

by $180,000 or 2.3%, to $7.5 million compared to $7.7 million in the previous year and represented 3.5% of total operating expenses.

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expenses decreased by $57,000 or 3.4%, to $1.6 million compared to $1.7 million in the previous year and represented 0.8% of total operating

Income tax expense was $18.2

million in 2021 compared to an income tax benefit of $1.6 million for 2020.

On March 27, 2020, the Coronavirus Aid, Relief and Economic

Security (“CARES”) Act was passed into law, providing wide ranging economic relief for individuals and businesses.

One component

of the CARES Act provides the Company with an opportunity to carry back net operating losses (“NOLs”) arising from 2018, 2019

and 2020 to the prior five tax years.

The Company has previously valued its NOLs at the federal corporate income tax rate of 21%.

the CARES Act provides for NOL carryback claims to be calculated based on a rate of 35%, which was the federal corporate tax rate in effect

for the carryback years.

The result of the revaluation of NOLs and other tax adjustments is a net tax benefit of $680,000 and $8.8 million

for 2021 and 2020, respectively.

Excluding the tax benefit, income tax expense for 2021 would have been $18.9 million, representing an

effective income tax rate of 29%.

For 2020, income tax expense would have been $7.2 million for an effective tax rate of 36%.

For the year ended December

31, 2022, we recorded income tax expense of $30.2 million, representing a 26% effective tax rate.

In the prior period, our income tax

expense was $18.2 million, representing a 28% effective tax rate.

Liquidity and Capital Resources

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Net cash used in investing

activities for the year ended December 31, 2022 and 2021 was $713.9 million and $115.4 million, respectively.

This compares to net cash

provided by investing activities of $93.0 million for the year ended December 31, 2020.

Cash used in investing activities generally relates

to purchases of automobile contracts.

Purchases of finance receivables were $1,673.2 million (includes acquisition fees paid), $1,107.5

million and $739.7 million in 2022, 2021 and 2020, respectively.

Cash provided by investing activities primarily results from principal

payments and other proceeds received on finance receivables.

activities for the year ended December 31, 2023, 2022 and 2021 was $359.5 million, $713.9 million and $115.4 million, respectively.

used in investing activities generally relates to purchases of automobile contracts.

Purchases of finance receivables were $1,251.0 million

(includes acquisition fees paid), $1,673.2 million and $1,107.5 million in 2023, 2022 and 2021, respectively.

Cash provided by investing

activities primarily results from principal payments and other proceeds received on finance receivables.

Net cash provided by financing

activities were $484.2 million in 2022.

Net cash used in financing activities for the year ended December 31, 2021 and 2020 was $50.4

million and $328.5 million, respectively.

activities were $84.2 million and $484.2 million in 2023 and 2022, respectively.

Net cash used in financing activities for the year ended

December 31, 2021 was $50.4 million.

Cash used or provided by financing activities is primarily related to the issuance of securitization

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and other debt.

We issued $1,411.0 million in new securitization trust debt in 2022 compared to $1,110.7 million in 2021 and $714.5 million

Repayments of securitization debt were $1,060.1 million, $1,153.1 million and $1,010.0 million in 2022, 2021 and 2020, respectively.

We issued $1,235.5 million in new securitization trust debt in 2023 compared to $1,411.0 million in 2022 and $1,110.7

million in 2021.

Repayments of securitization debt were $1,078.4 million, $1,060.1 million and $1,153.1 million in 2023, 2022 and 2021,

respectively.

We purchase automobile contracts

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We currently have and will

continue to have a substantial amount of indebtedness.

At December 31, 2022, we had approximately $2,469.0 million of debt outstanding.

Such debt consisted primarily of $2,108.7 million of securitization trust debt, and also included $285.3 million of warehouse lines of

credit, $49.6 million of residual interest financing debt and $25.3 million in subordinated renewable notes.

continue to have a substantial amount of outstanding indebtedness.

At December 31, 2023, we had approximately $2,566.5 million of debt

Such debt consisted primarily of $2,265.4 million of securitization trust debt, and also included $234.0 million of warehouse

lines of credit, $49.9 million of residual interest financing debt and $17.2 million in subordinated renewable notes.

Although we believe we are

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which will depend on the performance of such receivables, as to which there can be no assurance, are $826.3 million in 2024, $618.4 million

in 2024, $339.1 million in 2025, $202.3 million in 2026, $128.1 million in 2027, $55.3 million in 2028, and $0.6 million in 2029.

in 2025, $386.5 million in 2026, $242.8 million in 2027, $152.6 million in 2028, and $38.8 million in 2029.

(2) Long-term debt represents subordinated renewable notes.

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under this facility.

Prior to the expiration of the revolving period in January 2024, the revolving period was extended to March 31, 2024.

Capital Resources

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As of December 31, 2023, we were in compliance with all such covenants.

Forward-looking Statements

This report on Form 10-K includes

certain "forward-looking statements".

Forward-looking statements may be identified by the use of words such as "anticipates,"

"expects," "plans," "estimates," or words of like meaning.

As to the specifically identified forward-looking

statements, factors that could affect charge-offs and recovery rates include unexpected exogenous events, such as a widespread plague

that might affect the ability or willingness of obligors to pay pursuant to the terms of contracts;

mandates imposed in reaction to such

events, such as prohibitions of otherwise permissible activity, which might impair the obligation to perform contracts, or the ability

of obligors to earn;

changes in the general economic climate, which could affect the willingness or ability of obligors to pay pursuant

to the terms of contracts;

changes in laws respecting consumer finance, which could affect our ability to enforce rights under contracts;

and changes in the market for used vehicles, which could affect the levels of recoveries upon sale of repossessed vehicles.

could affect our revenues in the current year include the levels of cash releases from existing pools of contracts, which would affect

our ability to purchase contracts, the terms on which we are able to finance such purchases, the willingness of dealers to sell contracts

to us on the terms that it offers, and the terms on which we are able to complete term securitizations once contracts are acquired.

that could affect our expenses in the current year include competitive conditions in the market for qualified personnel, investor demand

for asset-backed securities and interest rates (which affect the rates that we pay on asset-backed securities issued in our securitizations).

The statements concerning structuring securitization transactions as secured financings and the effects of such structures on financial

items and on future profitability also are forward-looking statements.

Any change to the structure of our securitization transaction could

cause such forward-looking statements to be inaccurate.

Both the amount of the effect of the change in structure on our profitability

and the duration of the period in which our profitability would be affected by the change in securitization structure are estimates.

accuracy of such estimates will be affected by the rate at which we purchase and sell contracts, any changes in that rate, the credit

performance of such contracts, the financial terms of future securitizations, any changes in such terms over time, and other factors that

generally affect our profitability.

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