The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes contained in Item 8 of this Form 10-K, which is incorporated herein by reference.
Overview
We offer financing programs that enable automobile dealers to sell vehicles to consumers, regardless of their credit history. Our financing programs are offered through a nationwide network of automobile dealers who benefit from sales of vehicles to consumers who otherwise could not obtain financing; from repeat and referral sales generated by these same customers; and from sales to customers responding to advertisements for our financing programs, but who actually end up qualifying for traditional financing. For the year endedDecember 31, 2021 , consolidated net income was$958.3 million , or$59.52 per diluted share, compared to$421.0 million , or$23.47 per diluted share, for the same period in 2020. 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 onJanuary 1, 2020 . Our results for the year endedDecember 31, 2021 included: •An increase in forecasted collection rates for Consumer Loans assigned in 2017 through 2021, which increased forecasted net cash flows from our loan portfolio by$326.1 million . •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. For the year endedDecember 31, 2020 , consolidated net income was$421.0 million , or$23.47 per diluted share, compared to$656.1 million , or$34.57 per diluted share, for the same period in 2019. The decrease in consolidated net income was primarily due to an increase in provision for credit losses primarily due to the adoption of CECL onJanuary 1, 2020 . Our results for the year endedDecember 31, 2020 included: •A decrease in forecasted collection rates for Consumer Loans assigned in 2015 through 2019 and an increase in forecasted collection rates for Consumer Loans assigned in 2020, which decreased forecasted net cash flows from our loan portfolio by$46.3 million . •Forecasted profitability per Consumer Loan assignment that exceeded our initial estimate for Consumer Loans assigned in 2018 and 2019 and significantly exceeded our initial estimates for Consumer Loans assigned in 2020. •A decline in Consumer Loan assignment volume, as unit and dollar volumes declined 7.5% and 3.5%, respectively, as compared to 2019. •Stock repurchases of approximately 1.3 million shares, which represented 6.9% of the shares outstanding at the beginning of the year. 28 --------------------------------------------------------------------------------
Critical success factors
Critical success factors include our ability to accurately forecast Consumer Loan performance, access capital on acceptable terms, and maintain or grow Consumer Loan volume at the level and on the terms that we anticipate, with an objective to maximize economic profit. Economic profit is a non-GAAP financial measure we use to evaluate our financial results and determine incentive compensation. Economic profit measures how efficiently we utilize our total capital, both debt and equity, and is a function of the return on capital in excess of the cost of capital and the amount of capital invested in the business.
Consumer Loan Measures
At the time a Consumer Loan is submitted to us for assignment, we forecast future expected cash flows from the Consumer Loan. Based on the amount and timing of these forecasts and expected expense levels, an advance or one-time purchase payment is made to the related Dealer at a price designed to maximize economic profit. 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. 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 ofDecember 31, 2021 , with the forecasts as ofDecember 31, 2020 , as ofDecember 31, 2019 , and at the time of assignment, segmented by year of assignment: Forecasted Collection Percentage as of (1) Current Forecast Variance from Consumer Loan December 31, December 31, December 31, Initial December 31, Initial Assignment Year 2021 2020 2019 Forecast December 31, 2020 2019 Forecast 2012 73.8 % 73.8 % 73.9 % 71.4 % 0.0 % -0.1 % 2.4 % 2013 73.4 % 73.4 % 73.5 % 72.0 % 0.0 % -0.1 % 1.4 % 2014 71.5 % 71.6 % 71.7 % 71.8 % -0.1 % -0.2 % -0.3 % 2015 65.1 % 65.2 % 65.4 % 67.7 % -0.1 % -0.3 % -2.6 % 2016 63.6 % 63.6 % 64.1 % 65.4 % 0.0 % -0.5 % -1.8 % 2017 64.4 % 64.1 % 64.8 % 64.0 % 0.3 % -0.4 % 0.4 % 2018 65.1 % 64.0 % 65.1 % 63.6 % 1.1 % 0.0 % 1.5 % 2019 66.5 % 64.4 % 64.6 % 64.0 % 2.1 % 1.9 % 2.5 % 2020 67.9 % 64.8 % - 63.4 % 3.1 % - 4.5 % 2021 66.5 % - - 66.3 % - - 0.2 % (1)Represents the total forecasted collections we expect to collect on the Consumer Loans as a percentage of the repayments that we were contractually owed on the Consumer Loans at the time of assignment. 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 2012 and 2013 and 2018 through 2020 have yielded forecasted collection results significantly better than our initial estimates, while Consumer Loans assigned in 2015 and 2016 have yielded forecasted collection results significantly worse than our initial estimates. For all other assignment years presented, actual results have been close to our initial estimates. For the year endedDecember 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. For the year endedDecember 31, 2020 , forecasted collection rates improved for Consumer Loans assigned in 2020, declined for Consumer Loans assigned in 2015 through 2019 and were generally consistent with expectations at the start of the period for all other assignment years presented. 29 -------------------------------------------------------------------------------- The changes in forecasted collection rates impacted forecasted net cash flows (forecasted collections less forecasted Dealer Holdback payments) as follows: (In millions) For the
Completed exercises
Increase (decrease) in expected net cash
Flows 2021 2020 2019 Dealer Loans$ 87.7 $ (41.1) $ (7.9) Purchased Loans 238.4 (5.2) 22.5 Total$ 326.1 $ (46.3) $ 14.6 During the first quarter of 2020, we reduced our estimate of future net cash flows from our Loan portfolio by$206.5 million , or 2.3% of the forecasted net cash flows at the start of the period, primarily due to the impact of the COVID-19 pandemic. The reduction was comprised of: (1)$44.3 million calculated by our forecasting model, which reflected lower realized collections during the first quarter of 2020 and (2) an additional$162.2 million , which represented our best estimate of the future impact of the COVID-19 pandemic on future net cash flows. Under CECL, changes in the amount and timing of forecasted net cash flows are recorded as a provision for credit losses in the current period. We have continued to apply this adjustment to our forecast through the end of 2021 as it continues to represent our best estimate of the impact of the COVID-19 pandemic on future net cash flows. The COVID-19 pandemic has created conditions that increase the level of uncertainty associated with our estimate of the amount and timing of future net cash flows from our Loan portfolio.
The following table presents information on the average allocation of consumer loans for each of the last 10 years:
Average
Initial Loan Term
Consumer Loan Assignment Year Consumer Loan (1) Advance (2) (in months)
2012 $ 15,468 $ 7,165 47
2013 15,445 7,344 47
2014 15,692 7,492 47
2015 16,354 7,272 50
2016 18,218 7,976 53
2017 20,230 8,746 55
2018 22,158 9,635 57
2019 23,139 10,174 57
2020 24,262 10,656 59
2021 25,632 11,790 59
(1)Represents the repayments that we were contractually owed on Consumer Loans
at the time of assignment, which include both principal and interest.
(2)Represents advances paid to Dealers on Consumer Loans assigned under our
Portfolio Program and one-time payments made to Dealers to purchase Consumer
Loans assigned under our Purchase Program. Payments of Dealer Holdback and
accelerated Dealer Holdback are not included.
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.
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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, 2021 . All amounts, unless otherwise noted, are presented as a
percentage of the initial balance of the Consumer Loan (principal + interest).
The table includes both Dealer Loans and Purchased Loans.
As of December 31, 2021
Forecasted % of Forecast
Consumer Loan Assignment Year Collection %
Advance % (1) Spread % Realized (2)
2012 73.8 % 46.3 % 27.5 % 99.9 %
2013 73.4 % 47.6 % 25.8 % 99.7 %
2014 71.5 % 47.7 % 23.8 % 99.4 %
2015 65.1 % 44.5 % 20.6 % 98.8 %
2016 63.6 % 43.8 % 19.8 % 97.6 %
2017 64.4 % 43.2 % 21.2 % 93.4 %
2018 65.1 % 43.5 % 21.6 % 83.2 %
2019 66.5 % 44.0 % 22.5 % 68.1 %
2020 67.9 % 43.9 % 24.0 % 46.9 %
2021 66.5 % 46.0 % 20.5 % 17.4 %
(1)Represents advances paid to Dealers on Consumer Loans assigned under our
Portfolio Program and one-time payments made to Dealers to purchase Consumer
Loans assigned under our Purchase Program as a percentage of the initial balance
of the Consumer Loans. Payments of Dealer Holdback and accelerated Dealer
Holdback are not included.
(2)Presented as a percentage of total forecasted collections.
The risk of a material change in our forecasted collection rate declines as the
Consumer Loans age. For 2017 and prior Consumer Loan assignments, the risk of a
material forecast variance is modest, as we have currently realized in excess of
90% of the expected collections. 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 19.8% to 27.5% over the last 10 years. The spread was at the high
end of this range in 2012, when the competitive environment was unusually
favorable, and much lower during other years (2015 through 2019 and 2021) when
competition was more intense. Despite intense competition, the spread in 2020
was higher than other recent years due to Consumer Loan performance, which has
exceeded our initial estimates by a significantly greater margin than the other
years presented. The decrease in the spread from 2020 to 2021 was primarily the
result of the performance of 2020 Consumer Loans, partially offset by a higher
initial spread on 2021 Consumer Loans, primarily due to a higher initial
forecast on 2021 Consumer Loans.
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The following table compares our forecast of Consumer Loan collection rates as
of December 31, 2021 with the forecasts at the time of assignment, for Dealer
Loans and Purchased Loans separately:
Dealer Loans Purchased Loans
Forecasted Collection Percentage as of Forecasted Collection Percentage as of
(1) (1)
Consumer Loan Assignment December 31, Initial Initial
Year 2021 Forecast Variance December 31, 2021 Forecast Variance
2012 73.6 % 71.3 % 2.3 % 75.9 % 71.4 % 4.5 %
2013 73.3 % 72.1 % 1.2 % 74.2 % 71.6 % 2.6 %
2014 71.4 % 71.9 % -0.5 % 72.4 % 70.9 % 1.5 %
2015 64.4 % 67.5 % -3.1 % 68.9 % 68.5 % 0.4 %
2016 62.8 % 65.1 % -2.3 % 65.8 % 66.5 % -0.7 %
2017 63.8 % 63.8 % 0.0 % 66.0 % 64.6 % 1.4 %
2018 64.6 % 63.6 % 1.0 % 66.4 % 63.5 % 2.9 %
2019 66.2 % 63.9 % 2.3 % 67.2 % 64.2 % 3.0 %
2020 67.6 % 63.3 % 4.3 % 68.4 % 63.6 % 4.8 %
2021 66.2 % 66.3 % -0.1 % 67.1 % 66.3 % 0.8 %
(1) The forecasted collection rates presented for Dealer Loans and Purchased
Loans reflect the Consumer Loan classification at the time of assignment. The
forecasted collection rates represent the total forecasted collections we expect
to collect on the Consumer Loans as a percentage of the repayments that we were
contractually owed on the Consumer Loans at the time of assignment. 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.
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, 2021 for Dealer Loans and Purchased Loans separately. All
amounts are presented as a percentage of the initial balance of the Consumer
Loan (principal + interest).
Dealer Loans Purchased Loans
Consumer Loan Assignment Forecasted Advance % Forecasted Advance %
Year Collection % (1) (1)(2) Spread % Collection % (1) (1)(2) Spread %
2012 73.6 % 46.0 % 27.6 % 75.9 % 50.0 % 25.9 %
2013 73.3 % 47.2 % 26.1 % 74.2 % 51.5 % 22.7 %
2014 71.4 % 47.2 % 24.2 % 72.4 % 51.8 % 20.6 %
2015 64.4 % 43.4 % 21.0 % 68.9 % 50.2 % 18.7 %
2016 62.8 % 42.1 % 20.7 % 65.8 % 48.6 % 17.2 %
2017 63.8 % 42.1 % 21.7 % 66.0 % 45.8 % 20.2 %
2018 64.6 % 42.7 % 21.9 % 66.4 % 45.2 % 21.2 %
2019 66.2 % 43.1 % 23.1 % 67.2 % 45.6 % 21.6 %
2020 67.6 % 43.0 % 24.6 % 68.4 % 45.5 % 22.9 %
2021 66.2 % 45.1 % 21.1 % 67.1 % 47.7 % 19.4 %
(1)The forecasted collection rates and advance rates presented for Dealer Loans
and Purchased Loans reflect the Consumer Loan classification at the time of
assignment.
(2)Represents advances paid to Dealers on Consumer Loans assigned under our
Portfolio Program and one-time payments made to Dealers to purchase Consumer
Loans assigned under our Purchase Program as a percentage of the initial balance
of the Consumer Loans. Payments of Dealer Holdback and accelerated Dealer
Holdback are not included.
Although the Advance Rate on Purchased Loans is higher than the Advance Rate on Merchant Loans, Purchased Loans do not require us to pay a holdback to Merchants.
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The spread on Dealer Loans decreased from 24.6% in 2020 to 21.1% in 2021
primarily as a result of the performance of the 2020 Consumer Loans in our
Dealer Loan portfolio, which has significantly exceeded our initial estimates,
partially offset by a higher initial spread on 2021 Consumer Loans in our Dealer
Loan portfolio, primarily due to a higher initial forecast on 2021 Consumer
Loans in our Dealer Loan portfolio. The spread on Purchased Loans decreased from
22.9% in 2020 to 19.4% in 2021 primarily as a result of the performance of the
2020 Consumer Loans in our Purchased Loan portfolio, which has exceeded our
initial estimates by a significantly greater margin than those assigned to us in
2021, partially offset by a higher initial spread on 2021 Consumer Loans in our
Purchased Loan portfolio, primarily due to a higher initial forecast on 2021
Consumer Loans in our Purchased Loan portfolio.
Access to capital
Our strategy for accessing capital on acceptable terms needed to maintain and grow the business is to: (1) maintain consistent financial performance; (2) maintain modest financial leverage; and (3) maintain multiple funding sources. Our funded debt to equity ratio was 2.5 to 1 as ofDecember 31, 2021 . We currently utilize the following primary forms of debt financing: (1) a revolving secured line of credit; (2) Warehouse facilities; (3) Term ABS financings; and (4) senior notes. Consumer Loan Volume
The following table summarizes the evolution of consumer loan origination volume in each of the last three years compared to the same period of the previous year:
Year over Year Percent
Change
For the Year Ended December 31, Unit Volume Dollar Volume (1)
2019 -0.9 % 4.9 %
2020 -7.5 % -3.5 %
2021 -21.4 % -13.0 %
(1) Represents advances paid to dealers on consumer loans awarded under our portfolio program and one-time payments made to dealers to purchase consumer loans awarded under our purchase program. Dealer holdback and accelerated dealer holdback payments are not included.
Consumer Loan assignment volumes depend on a number of factors including (1) the
overall demand for our financing programs, (2) the amount of capital available
to fund new Loans, and (3) our assessment of the volume that our infrastructure
can support. Our pricing strategy is intended to maximize the amount of economic
profit we generate, within the confines of capital and infrastructure
constraints.
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.
During 2020, unit and dollar volumes decreased 7.5% and 3.5%, respectively, as
the number of active Dealers declined 5.3% while average volume per active
Dealer decreased 2.5%. Dollar volume declined less than unit volume during 2020
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 increases in the average vehicle selling price and average
initial loan term and an increase in Purchased Loans as a percentage of total
unit volume.
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The following table summarizes the changes in Consumer Loan unit volume and
active Dealers:
For the Years Ended December 31, For the Years Ended December 31,
2021 2020 % Change 2020 2019 % Change
Consumer Loan unit volume 268,730 341,967 -21.4 % 341,967 369,805 -7.5 %
Active Dealers (1) 11,410 12,690 -10.1 % 12,690 13,399 -5.3 %
Average volume per active
Dealer 23.6 26.9 -12.3 % 26.9 27.6 -2.5 %
Consumer Loan unit volume from
Dealers active both periods 249,743 315,540 -20.9 % 309,179 338,939 -8.8 %
Dealers active both periods 9,196 9,196 - 9,795 9,795 -
Average volume per Dealer
active both periods 27.2 34.3 -20.9 % 31.6 34.6 -8.8 %
Consumer Loan unit volume from
Dealers not active both periods 18,987 26,427 -28.2 % 32,788 30,866 6.2 %
Dealers not active both periods 2,214 3,494 -36.6 % 2,895 3,604 -19.7 %
Average volume per Dealer not
active both periods 8.6 7.6 13.2 % 11.3 8.6 31.4 %
(1) Active Merchants are Merchants who received financing for at least one Consumer Loan during the period.
The following table provides additional information on the evolution of the volume of consumer credit units and active dealers:
For the Years Ended December 31, For the Years Ended December 31,
2021 2020 % Change 2020 2019 % Change
Consumer Loan unit volume from
new active Dealers 18,267 30,968 -41.0 % 30,968 44,938 -31.1 %
New active Dealers (1) 2,094 2,730 -23.3 % 2,730 3,936 -30.6 %
Average volume per new active
Dealer 8.7 11.3 -23.0 % 11.3 11.4 -0.9 %
Attrition (2) -7.7 % -8.3 % -8.3 % -8.1 %
(1)New active Dealers are Dealers who enrolled in our program and have received
funding for their first Loan from us during the period.
(2)Attrition is measured according to the following formula: decrease in
Consumer Loan unit volume from Dealers who have received funding for at least
one Loan during the comparable period of the prior year but did not receive
funding for any Loans during the current period divided by prior year comparable
period Consumer Loan unit volume.
Consumer Loans are assigned to us as either Dealer Loans through our Portfolio
Program or Purchased Loans through our Purchase Program. The following table
shows the percentage of Consumer Loans assigned to us under each of the programs
for each of the last three years:
Unit Volume Dollar Volume (1)
For the Years Ended December 31, Portfolio Program Purchase Program Portfolio Program Purchase Program
2019 67.2 % 32.8 % 64.3 % 35.7 %
2020 64.1 % 35.9 % 60.6 % 39.4 %
2021 67.9 % 32.1 % 65.0 % 35.0 %
(1) Represents advances paid to dealers on consumer loans awarded under our portfolio program and one-time payments made to dealers to purchase consumer loans awarded under our purchase program. Dealer holdback and accelerated dealer holdback payments are not included.
From
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Operating results
The following is a discussion of our 2021 and 2020 results of operations and income statement data on a consolidated basis, including year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 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 endedDecember 31, 2020 . 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. 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.
Year ended
(in millions of dollars, except per share data)
For the years ended
2021 2020 $ Change % Change Revenue: Finance charges$ 1,742.6 $ 1,562.4 $ 180.2 11.5 % Premiums earned 60.3 57.3 3.0 5.2 % Other income 53.1 49.6 3.5 7.1 % Total revenue 1,856.0 1,669.3 186.7 11.2 % Costs and expenses: Salaries and wages (1) 218.1 186.5 31.6 16.9 % General and administrative (1) 100.3 69.6 30.7 44.1 % Sales and marketing (1) 65.3 69.5 (4.2) -6.0 % Provision for credit losses 8.4 556.9 (548.5) -98.5 % Interest 164.2 192.0 (27.8) -14.5 % Provision for claims 38.8 37.9 0.9 2.4 % Loss on extinguishment of debt - 7.4 (7.4) -100.0 % Total costs and expenses 595.1 1,119.8 (524.7) -46.9 % Income before provision for income taxes 1,260.9 549.5 711.4 129.5 % Provision for income taxes 302.6 128.5 174.1 135.5 % Net income$ 958.3 $ 421.0 $ 537.3 127.6 % Net income per share: Basic$ 59.57 $ 23.57 $ 36.00 152.7 % Diluted$ 59.52 $ 23.47 $ 36.05 153.6 % Weighted average shares outstanding: Basic 16,085,823 17,858,935 (1,773,112) -9.9 % Diluted 16,100,552 17,935,779 (1,835,227) -10.2 %
(1) Operating expenses$ 383.7 $ 325.6 $ 58.1 17.8 % 35
-------------------------------------------------------------------------------- Finance Charges. The increase of$180.2 million , or 11.5%, was primarily the result of an increase in the average yield on our Loan portfolio, as follows: (Dollars in millions) For the Years Ended December 31, 2021 2020 Change
Average net balance of loans receivable
Average return on our loan portfolio
26.0 % 23.1 %
2.9%
The following table summarizes the impact of each component on the overall increase in finance costs for the year ended
For the year ended
Impact on finance charges: December 31, 2021 Due to an increase in the average yield $ 193.8 Due to a decrease in the average net Loans receivable balance (13.6) Total increase in finance charges
$180.2
The average yield on our Loan portfolio for the year endedDecember 31, 2021 increased as compared to the same period in 2020 primarily due to the adoption of CECL onJanuary 1, 2020 , which requires us to recognize finance charges on new Consumer Loan assignments using effective interest rates based on contractual future net cash flows, which are significantly in excess of our expected yields. Operating Expenses. The increase of$58.1 million , or 17.8%, was primarily due to: •An increase in salaries and wages expense of$31.6 million , or 16.9%, comprised of the following: •An increase in stock-based compensation expense of$18.6 million , due to an increase of$33.7 million related to stock options and a decrease of$15.1 million related to restricted stock and restricted stock units. We recognized$33.7 million of expense in 2021 for stock options granted fromDecember 2020 throughAugust 2021 primarily due to a change in the incentive compensation program for senior management. During the second quarter of 2021, we recognized an$11.5 million reversal of stock-based compensation expense due to the forfeiture of unvested restricted stock and restricted stock units upon the retirement of our former Chief Executive Officer inMay 2021 . For additional information, see Note 14 to the consolidated financial statements contained in Item 8 of this Form 10-K, which is incorporated herein by reference. •An increase of$22.3 million , excluding stock-based compensation and cash-based incentive compensation, related to increases of$12.8 million for our support function,$9.0 million for our servicing function and$0.5 million for our originations function. The increase in our support function was primarily related to a$7.4 million increase related to our information technology department. •A decrease of$9.3 million in cash-based incentive compensation expense, primarily due to a change in the incentive compensation program for senior management, which eliminated annual cash awards in favor of longer-term equity awards, partially offset by an increase in profit sharing primarily due to an improvement in Company performance measures. •An increase in general and administrative expense of$30.7 million , or 44.1%, primarily due to an increase in legal expenses, which included a$27.2 million settlement with theCommonwealth of Massachusetts to settle and fully resolve the claims asserted against the Company. For additional information, see Note 16 to the consolidated financial statements contained in Item 8 of this Form 10-K, which is incorporated herein by reference. Provision for Credit Losses. The decrease of$548.5 million , or 98.5%, was due to decreases in provision for credit losses on forecast changes and provision for credit losses on new Consumer Loan assignments. We recognize provision for credit losses on new Consumer Loan assignments for contractual net cash flows that are not expected to be realized at the time of assignment. We also recognize provision for credit losses on forecast changes in the amount and timing of expected future net cash flows subsequent to assignment. The following table summarizes the provision for credit losses for each of these components: (In millions) For the Years Ended December 31, Provision for Credit Losses 2021 2020 Change New Consumer Loan assignments$ 365.1 $ 518.6 $ (153.5) Forecast changes (356.7) 38.3 (395.0) Total$ 8.4 $ 556.9 $ (548.5) 36
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The decrease in PCL related to new consumer loan assignments is due to a 21.4% decrease in unit volume of consumer loan assignments and lower average PCL by disposal of consumer loans, mainly due to a higher initial forecast on 2021 Lending assignments.
The decrease in provision for credit losses related to forecast changes was primarily due to an improvement in Consumer Loan performance. For the year endedDecember 31, 2021 , we increased our estimate of future net cash flows by$326.1 million to reflect improvements in Consumer Loan performance during the period. For the year endedDecember 31, 2020 , we decreased our estimate of future net cash flows by$46.3 million to reflect the estimated long-term impact of COVID-19 on Consumer Loan performance.
Interest. The decrease in
(Dollars in millions) For the
Completed exercises
2021 2020 Change Interest expense$ 164.2 $ 192.0 $ (27.8) Average outstanding debt principal balance (1) 4,728.9 4,712.8 16.1 Average cost of debt 3.5 % 4.1 % -0.6 %
(1) Includes unamortized debt discount and excludes deferred debt issuance costs.
The decrease in our average cost of debt is primarily due to lower interest rates on recently concluded secured financings.
Provision for Income Taxes. For the year endedDecember 31, 2021 , the effective income tax rate increased to 24.0% from 23.4% for the year endedDecember 31, 2020 . The increase was primarily due to an increase in our state income tax rate and the impact of tax benefits related to our stock-based compensation plan on our effective income tax rate. The increase in our state income tax rate was primarily the result of the settlement of an uncertain tax position for state income taxes during 2020. The impact of tax benefits related to our stock-based compensation plan, which reduce our effective income tax rate, decreased from 2020 to 2021 primarily due to an increase in pre-tax income. For additional information, see Note 11 to the consolidated financial statements contained in Item 8 of this Form 10-K, which is incorporated herein by reference.
Critical accounting estimates
Our consolidated financial statements are prepared in accordance with GAAP. The
preparation of these financial statements requires management to make estimates
and judgments that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. On an ongoing basis, we review our accounting policies,
assumptions, estimates and judgments to ensure that our financial statements are
presented fairly and in accordance with GAAP.
Our significant accounting policies are discussed in Note 2 to the consolidated
financial statements contained in Item 8 of this Form 10-K, which is
incorporated herein by reference. We believe that the following accounting
estimates are the most critical to aid in fully understanding and evaluating our
reported financial results, and involve a high degree of subjective or complex
judgment, and the use of different estimates or assumptions could produce
materially different financial results.
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Income from finance charges and provision for credit losses
Nature of estimates required. We estimate the amount and timing of future recoveries and retainer payments from dealers. These estimates impact loans receivable and allowance for credit losses on our balance sheet and finance costs and allowance for credit losses on our income statement.
Assumptions and Approaches Used. OnJanuary 1, 2020 , we adopted Accounting Standards Update 2016-13, Measurement of Credit Losses on Financial Instruments, which is known as the current expected credit loss model, or CECL. Prior to the adoption of CECL onJanuary 1, 2020 , we accounted for our Loans as loans acquired with significant credit deterioration. For additional information regarding the adoption impact of CECL, 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. We recognize finance charges under the interest method such that revenue is recognized on a level-yield basis over the life of the Loan. We calculate finance charges on a monthly basis by applying the effective interest rate of the Loan to the net carrying amount of the Loan (Loan receivable less the related allowance for credit losses). For Consumer Loans assigned on or subsequent toJanuary 1, 2020 , the effective interest rate is based on contractual future net cash flows. For Consumer Loans assigned prior toJanuary 1, 2020 , the effective interest rate was determined based on expected future net cash flows. The outstanding balance of the allowance for credit losses of each Loan represents the amount required to reduce the net carrying amount of Loans (Loans receivable less allowance for credit losses) to the present value of expected future net cash flows discounted at the effective interest rate. Expected future net cash flows for Dealer Loans are comprised of expected future collections on the assigned Consumer Loans, less any expected future Dealer Holdback payments. 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. Unless the consumer is no longer contractually obligated to pay us, we forecast future collections on each Consumer Loan for a 120 month period after the origination date. Expected future Dealer Holdback payments are forecasted for each individual Dealer based on the expected future collections and current advance balance of each Dealer Loan. We monitor and evaluate Consumer Loan performance on a monthly basis by comparing our current forecasted collection rates to our initial expectations. We use a statistical model that considers a number of credit quality indicators to estimate the expected collection rate for each Consumer Loan at the time of assignment. 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. Our evaluation becomes more accurate as the Consumer Loans age, as we use actual performance data in our forecast. Since all known, significant credit quality indicators have already been factored into our forecasts and pricing, we are not able to use any specific credit quality indicators to predict or explain variances in actual performance from our initial expectations. Any variances in performance from our initial expectations are the result of Consumer Loans performing differently from historical Consumer Loans with similar characteristics. 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 quarter of 2020, we reduced our estimate of future net cash flows from our Loan portfolio by$206.5 million , or 2.3% of the forecasted net cash flows at the start of the period, primarily due to the impact of the COVID-19 pandemic. The reduction was comprised of: (1)$44.3 million calculated by our forecasting model, which reflected lower realized collections during the first quarter of 2020 and (2) an additional$162.2 million , which represented our best estimate of the future impact of the COVID-19 pandemic on future net cash flows. Under CECL, changes in the amount and timing of forecasted net cash flows are recorded as a provision for credit losses in the current period. We have continued to apply this adjustment to our forecast through the end of 2021 as it continues to represent our best estimate of the impact of the COVID-19 pandemic on future net cash flows. The COVID-19 pandemic has created conditions that increase the level of uncertainty associated with our estimate of the amount and timing of future net cash flows from our Loan portfolio. 38 -------------------------------------------------------------------------------- Our provision for credit losses for the year endedDecember 31, 2021 , included: •$365.1 million provision for credit losses on new Consumer Loan assignments, which reduced consolidated net income by$281.1 million , or$17.46 per diluted share; and •$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. Our provision for credit losses for the year endedDecember 31, 2020 , included: •$518.6 million provision for credit losses on new Consumer Loan assignments related to the adoption of CECL onJanuary 1, 2020 , which reduced consolidated net income by$399.3 million , or$22.26 per diluted share; and •$38.3 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$29.5 million , or$1.64 per diluted share. Key Factors. Variances in the amount and timing of future net cash flows from current estimates could materially impact earnings in future periods. A 1% decline in the forecasted future net cash flows on Loans as ofDecember 31, 2021 would have reduced 2021 net income by approximately$47.5 million . During periods of economic slowdown or recession, delinquencies, defaults, repossessions and losses may increase on our Consumer Loans, and Consumer Loan prepayments may decline. These periods are also typically accompanied by decreased consumer demand for automobiles and declining values of automobiles securing outstanding Consumer Loans, which weakens collateral coverage and increases the amount of a loss in the event of default. 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. 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. Premiums Earned
Nature of estimates required. We estimate the profile of future claims on vehicle maintenance contracts. These estimates affect accounts payable and accrued liabilities on our balance sheet and earned premiums on our income statement.
Assumptions and Approaches Used. Premiums from the reinsurance of vehicle service contracts are recognized over the life of the policy in proportion to the expected costs of servicing those contracts. Expected costs are determined based on our historical claims experience. In developing our cost expectations, we stratify our historical claims experience into groupings based on contractual term, as this characteristic has led to different patterns of cost incurrence in the past. We will continue to update our analysis of historical costs under the vehicle service contract program as appropriate, including the consideration of other characteristics that may have led to different patterns of cost incurrence, and revise our revenue recognition timing for any changes in the pattern of our expected costs as they are identified. Key Factors. Variances in the pattern of future claims from our current estimates would impact the timing of premiums recognized in future periods. A 10% change in premiums earned for the year endedDecember 31, 2021 would have affected 2021 net income by approximately$4.6 million .
Contingencies
Nature of Estimates Required. We estimate the likelihood of adverse judgments
against us and any resulting damages, fines or statutory penalties owed. These
estimates impact accounts payable and accrued liabilities on our balance sheet
and are general and administrative expenses on our income statement.
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Assumptions and Approaches Used. With assistance from our legal counsel, we
determine if the likelihood of an adverse judgment for various claims,
litigation and regulatory investigations is remote, reasonably possible, or
probable. To the extent we believe an adverse judgment is probable and the
amount of the judgment is estimable, we recognize a liability. For information
regarding current actions to which we are a party, see Note 16 to the
consolidated financial statements contained in Item 8 of this Form 10-K, which
is incorporated herein by reference.
Key factors. Negative deviations in the ultimate settlement of pending claims and litigation from current estimates could result in additional expenses in future periods.
Uncertain Tax Positions Nature of Estimates Required. We estimate the impact of an uncertain income tax position on the income tax return. These estimates impact income taxes receivable and accounts payable and accrued liabilities on our balance sheet and provision for income taxes on our income statement. Assumptions and Approaches Used. We follow a two-step approach for recognizing uncertain tax positions. First, we evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more-likely-than-not that the position will be sustained upon examination, including resolution of related appeals or litigation processes, if any. Second, for positions that we determine are more-likely-than-not to be sustained, we recognize the tax benefit as the largest benefit that has a greater than 50% likelihood of being sustained. We establish a reserve for uncertain tax positions liability that is comprised of unrecognized tax benefits and related interest. We adjust this liability in the period in which an uncertain tax position is effectively settled, the statute of limitations expires for the relevant taxing authority to examine the tax position, or more information becomes available. Key Factors. To the extent we prevail in matters for which a liability has been established or are required to pay amounts in excess of our established liability, our effective income tax rate in future periods could be materially affected.
Cash and capital resources
We need capital to maintain and grow our business. 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; (2) Warehouse facilities; (3) Term ABS financings; and (4) senior notes. There are various restrictive covenants to which we are subject under each financing arrangement and we were in compliance with those covenants as ofDecember 31, 2021 . 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.
At
OnJanuary 29, 2021 , we extended the date on which our$300.0 million Warehouse Facility IV will cease to revolve fromJuly 26, 2022 toNovember 17, 2023 . The interest rate on borrowings under the facility has been increased from LIBOR plus 200 basis points to LIBOR plus 210 basis points.
At
OnFebruary 18, 2021 , we completed a$500.0 million Term ABS financing, which was used to repay outstanding indebtedness. The financing has an expected annualized cost of approximately 1.4% (including the initial purchasers' fees and other costs), and it will revolve for 24 months, after which it will amortize based upon the cash flows on the contributed Loans. OnMay 20, 2021 , we completed a$450.0 million Term ABS financing, which was used to repay outstanding indebtedness and for general corporate purposes. The financing has an expected annualized cost of approximately 1.5% (including the initial purchasers' fees and other costs), and it will revolve for 24 months, after which it will amortize based upon the cash flows on the contributed Loans. 40 --------------------------------------------------------------------------------
At
OnOctober 6, 2021 , we increased the financing amount on our revolving secured line of credit facility with a commercial bank syndicate from$340.0 million to$385.0 million . We also extended the maturity of the facility fromJune 22, 2023 toJune 22, 2024 . The amount of the facility will decrease by$35.0 million onJune 22, 2022 , and will further decrease by$25.0 million onJune 22, 2023 .
At
OnOctober 28, 2021 , we completed a$250.1 million Term ABS financing, which was used to repay outstanding indebtedness and for general corporate purposes. The financing has an expected annualized cost of approximately 1.8% (including the initial purchasers' fees and other costs), and it will revolve for 24 months, after which it will amortize based upon the cash flows on the contributed Loans. OnNovember 30, 2021 , we increased the financing amount on our revolving secured line of credit facility with a commercial bank syndicate from$385.0 million to$435.0 million . As noted above, the amount of the facility will decrease by$35.0 million onJune 22, 2022 , and will further decrease by$25.0 million onJune 22, 2023 . Cash and cash equivalents increased to$23.3 million as ofDecember 31, 2021 from$16.0 million as ofDecember 31, 2020 . As ofDecember 31, 2021 andDecember 31, 2020 we had$1,532.4 million and$1,419.1 million , respectively, in unused and available lines of credit. Our total balance sheet indebtedness increased to$4,616.3 million as ofDecember 31, 2021 from$4,608.6 million as ofDecember 31, 2020 .
A summary of material future financial obligations requiring repayments to the
(In millions) Payments Due as of December 31, 2021
In less than In 12 months
12 months or more Total
Long-term debt, including current maturities (1)
Dealer Hold (2)
188.4 836.6 1,025.0 Operating lease obligations (3) 1.0 1.4 2.4 Purchase obligations (4) 3.1 10.8 13.9 Total financial obligations$ 1,623.7
(1)The amounts presented consist solely of principal and do not reflect deferred debt issuance costs of$26.4 million . 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, and our senior notes as ofDecember 31, 2021 , the forecasted principal amounts outstanding on all other debt and the actual interest rates in effect as ofDecember 31, 2021 , interest is expected to be approximately$106.9 million during 2022;$70.5 million during 2023; and$91.5 million during 2024 and thereafter. (2)We have contractual obligations to pay Dealer Holdback to our 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 ofDecember 31, 2021 . (3)A lease liability of$0.5 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. Based upon anticipated cash flows, management believes that cash flows from operations and our various financing alternatives will provide sufficient financing for debt maturities and for future operations. Our ability to borrow funds may be impacted by economic and financial market conditions. If the various financing alternatives were to become limited or unavailable to us, our operations and liquidity could be materially and adversely affected.
Off-balance sheet arrangements
We do not have any off-balance sheet arrangements that have or are reasonably
likely to have a material current or future effect on our financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources.
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Market risk
We are exposed primarily to market risks associated with movements in interest rates. Our policies and procedures prohibit the use of financial instruments for speculative purposes. A discussion of our accounting policies for derivative instruments is included in Note 2 to the consolidated financial statements contained in Item 8 of this Form 10-K, which is incorporated herein by reference.
Interest rate risk. We rely on various sources of funding, some of which have variable interest rates and expose us to the risks associated with rising interest rates. We manage this risk primarily by entering into interest rate cap agreements.
As ofDecember 31, 2021 , we had$2.6 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$0.0 million , assuming we maintain a level amount of floating rate debt. As ofDecember 31, 2021 , 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. However, as ofDecember 31, 2021 , there was no floating rate debt outstanding under these facilities.
From
As ofDecember 31, 2021 , 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 5.50% on the underlying benchmark rate. For every 100-basis-point increase in interest rates on Term ABS 2021-1 up to the cap rate of 5.50%, annual after-tax earnings would decrease by approximately$0.8 million , assuming we maintain a level amount of floating rate debt.
New accounting updates
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 updates and the impact of the implementation of this update on our financial statements:
•Simplification of income tax accounting.
Forward-looking statements
We make forward-looking statements in this report and may make such statements in future filings with theSEC . We may also make forward-looking statements in our press releases or other public or shareholder communications. Our forward-looking statements are subject to risks and uncertainties and include information about our expectations and possible or assumed future results of operations. When we use any of the words "may," "will," "should," "believe," "expect," "anticipate," "assume," "forecast," "estimate," "intend," "plan," "target" or similar expressions, we are making forward-looking statements. We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all of our forward-looking statements. These forward-looking statements represent our outlook only as of the date of this report. While we believe that our forward-looking statements are reasonable, actual results could differ materially since the statements are based on our current expectations, which are subject to risks and uncertainties. Factors that might cause such a difference include, but are not limited to, the factors set forth in Item 1A of this Form 10-K, which is incorporated herein by reference, and the risks and uncertainties discussed elsewhere in this Form 10-K and in our other reports filed or furnished from time to time with theSEC .
SECTION 7A. QUANTITATIVE AND QUALITATIVE INFORMATION ON MARKET RISK
The information required by Item 7A is incorporated herein by reference from the information in Item 7 under the heading “Market Risk” in this Form 10-K.
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