QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2023
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-20202
CREDIT ACCEPTANCE CORPORATION
(Exact name of registrant as specified in its charter)
Michigan
38-1999511
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
25505 W. Twelve Mile Road
Southfield,
Michigan
48034-8339
(Address of principal executive offices)
(Zip Code)
(248) 353-2700
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common Stock, $.01 par value
CACC
The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yesþ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
The number of shares of Common Stock, $.01 par value, outstanding on July 25, 2023 was 12,822,201.
TABLE OF CONTENTS
PART I. — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - As of June 30, 2023 and December 31, 2022
Preferred stock, $.01 par value, 1,000,000 shares authorized, none issued
—
—
Common stock, $.01 par value, 80,000,000 shares authorized, 12,821,681 and 12,756,885 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively
0.1
0.1
Paid-in capital
261.7
245.7
Retained earnings
1,487.9
1,381.1
Accumulated other comprehensive loss
(2.7)
(2.9)
Total shareholders’ equity
1,747.0
1,624.0
Total liabilities and shareholders’ equity
$
7,205.5
$
6,904.7
See accompanying notes to consolidated financial statements.
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles” or “GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for interim periods are not necessarily indicative of actual results achieved for full fiscal years. The consolidated balance sheet as of December 31, 2022 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by GAAP for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2022 for Credit Acceptance Corporation (the “Company”, “Credit Acceptance”, “we”, “our” or “us”).
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
We have evaluated events and transactions occurring subsequent to the consolidated balance sheet date of June 30, 2023 for items that could potentially be recognized or disclosed in these financial statements. We did not identify any items that would require disclosure in or adjustment to the consolidated financial statements.
Reclassification
Certain amounts for prior periods have been reclassified to conform to the current presentation.
2. DESCRIPTION OF BUSINESS
Since 1972, Credit Acceptance has offered 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.
Without our financing programs, consumers are often unable to purchase vehicles or they purchase unreliable ones. Further, as we report to the three national credit reporting agencies, an important ancillary benefit of our programs is that we provide consumers with an opportunity to improve their lives by improving their credit score and move on to more traditional sources of financing.
We refer to automobile dealers who participate in our programs and who share our commitment to changing consumers’ lives as “Dealers”. Upon enrollment in our financing programs, the Dealer enters into a Dealer servicing agreement with us that defines the legal relationship between Credit Acceptance and the Dealer. The Dealer servicing agreement assigns the responsibilities for administering, servicing, and collecting the amounts due on retail installment contracts (referred to as “Consumer Loans”) from the Dealers to us. We are an indirect lender from a legal perspective, meaning the Consumer Loan is originated by the Dealer and assigned to us.
The vast majority of the Consumer Loans assigned to us are made to consumers with impaired or limited credit histories. The following table shows the percentage of Consumer Loans assigned to us with either FICO® scores below 650 or no FICO® scores:
For the Three Months Ended June 30,
For the Six Months Ended June 30,
Consumer Loan Assignment Volume
2023
2022
2023
2022
Percentage of total unit volume with either FICO® scores below 650 or no FICO® scores
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)
We have two programs: the Portfolio Program and the Purchase Program. Under the Portfolio Program, we advance money to Dealers (referred to as a “Dealer Loan”) in exchange for the right to service the underlying Consumer Loans. Under the Purchase Program, we buy the Consumer Loans from the Dealers (referred to as a “Purchased Loan”) and keep all amounts collected from the consumer. Dealer Loans and Purchased Loans are collectively referred to as “Loans”. The following table shows the percentage of Consumer Loans assigned to us as Dealer Loans and Purchased Loans for each of the last six quarters:
Unit Volume
Dollar Volume (1)
Three Months Ended
Dealer Loans
Purchased Loans
Dealer Loans
Purchased Loans
March 31, 2022
72.7
%
27.3
%
68.6
%
31.4
%
June 30, 2022
74.0
%
26.0
%
70.4
%
29.6
%
September 30, 2022
74.3
%
25.7
%
70.5
%
29.5
%
December 31, 2022
73.1
%
26.9
%
69.6
%
30.4
%
March 31, 2023
72.1
%
27.9
%
68.1
%
31.9
%
June 30, 2023
72.4
%
27.6
%
68.6
%
31.4
%
(1)Represents advances paid to Dealers on Consumer Loans assigned under our Portfolio Program and one-time payments made to Dealers to purchase Consumer Loans assigned under our Purchase Program. Payments of Dealer Holdback (as defined below) and accelerated Dealer Holdback are not included.
Portfolio Program
As payment for the vehicle, the Dealer generally receives the following:
•a down payment from the consumer;
•a non-recourse cash payment (“advance”) from us; and
•after the advance balance (cash advance and related Dealer Loan fees and costs) has been recovered by us, the cash from payments made on the Consumer Loan, net of certain collection costs and our servicing fee (“Dealer Holdback”).
We record the amount advanced to the Dealer as a Dealer Loan, which is classified within Loans receivable in our consolidated balance sheets. Cash advanced to the Dealer is automatically assigned to the Dealer’s open pool of advances. Dealers make an election as to how many Consumer Loans (either 50 or 100) will be assigned to an open pool before it is closed, and subsequent advances are assigned to a new pool. Unless we receive a request from the Dealer to keep a pool open, we automatically close each pool based on the Dealer’s election. All advances within a Dealer’s pool are secured by the future collections on the related Consumer Loans assigned to the pool. For Dealers with more than one pool, the pools are cross-collateralized so the performance of other pools is considered in determining eligibility for Dealer Holdback. We perfect our security interest with respect to the Dealer Loans by obtaining control or taking possession of the Consumer Loans, which list us as lien holder on the vehicle title.
The Dealer servicing agreement provides that collections received by us during a calendar month on Consumer Loans assigned by a Dealer are applied on a pool-by-pool basis as follows:
•first, to reimburse us for certain collection costs;
•second, to pay us our servicing fee, which generally equals 20% of collections;
•third, to reduce the aggregate advance balance and to pay any other amounts due from the Dealer to us; and
•fourth, to the Dealer as payment of Dealer Holdback.
If the collections on Consumer Loans from a Dealer’s pool are not sufficient to repay the advance balance and any other amounts due to us, the Dealer will not receive Dealer Holdback. Certain events may also result in Dealers forfeiting their rights to Dealer Holdback, including becoming inactive before assigning 100 Consumer Loans.
Dealers have an opportunity to receive an accelerated Dealer Holdback payment each time a pool of Consumer Loans is closed. The amount paid to the Dealer is calculated using a formula that considers the number of Consumer Loans assigned to the pool and the related forecasted collections and advance balance.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)
Since typically the combination of the advance and the consumer’s down payment provides the Dealer with a cash profit at the time of sale, the Dealer’s risk in the Consumer Loan is limited. We cannot demand repayment of the advance from the Dealer except in the event the Dealer is in default of the Dealer servicing agreement. Advances are made only after the consumer and Dealer have signed a Consumer Loan contract, we have received the executed Consumer Loan contract and supporting documentation in either physical or electronic form, and we have approved all of the related stipulations for funding.
For accounting purposes, the transactions described under the Portfolio Program are not considered to be loans to consumers. Instead, our accounting reflects that of a lender to the Dealer. The classification as a Dealer Loan for accounting purposes is primarily a result of (1) the Dealer’s financial interest in the Consumer Loan and (2) certain elements of our legal relationship with the Dealer.
Purchase Program
The Purchase Program differs from our Portfolio Program in that the Dealer receives a one-time payment from us at the time of assignment to purchase the Consumer Loan instead of a cash advance at the time of assignment and future Dealer Holdback payments. For accounting purposes, the transactions described under the Purchase Program are considered to be originated by the Dealer and then purchased by us.
Program Enrollment
Dealers are granted access to our Portfolio Program upon enrollment. Access to the Purchase Program is typically only granted to Dealers that meet one of the following:
•assigned at least 50 Consumer Loans under the Portfolio Program;
•franchise dealership; or
•independent dealership that meets certain criteria upon enrollment.
Seasonality
Our business is seasonal with peak Consumer Loan assignments and collections occurring during the first quarter of the year. This seasonality has a material impact on our interim results, as we are required to recognize a significant provision for credit losses expense at the time of assignment. For additional information, see Note 3.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Segment Information
We currently operate in one reportable segment which represents our core business of offering financing programs that enable Dealers to sell vehicles to consumers, regardless of their credit history. The consolidated financial statements reflect the financial results of our one reportable operating segment.
Cash and Cash Equivalents and Restricted Cash and Cash Equivalents
Cash equivalents consist of readily marketable securities with original maturities at the date of acquisition of three months or less. As of June 30, 2023 and December 31, 2022, we had $2.8 million and $7.1 million, respectively, in cash and cash equivalents that were not insured by the Federal Deposit Insurance Corporation (“FDIC”).
Restricted cash and cash equivalents consist of cash pledged as collateral for secured financings and cash held in a trust for future vehicle service contract claims. As of June 30, 2023 and December 31, 2022, we had $405.0 million and $406.5 million, respectively, in restricted cash and cash equivalents that were not insured by the FDIC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)
The following table provides a reconciliation of cash and cash equivalents and restricted cash and cash equivalents reported in our consolidated balance sheets to the total shown in our consolidated statements of cash flows:
(In millions)
As of
June 30, 2023
December 31, 2022
June 30, 2022
December 31, 2021
Cash and cash equivalents
$
3.2
$
7.7
$
4.1
$
23.3
Restricted cash and cash equivalents
408.8
410.0
426.7
410.9
Total cash and cash equivalents and restricted cash and cash equivalents
$
412.0
$
417.7
$
430.8
$
434.2
Restricted Securities Available for Sale
Restricted securities available for sale consist of amounts held in a trust for future vehicle service contract claims. We determine the appropriate classification of our investments in debt securities at the time of purchase and reevaluate such determinations at each balance sheet date. Debt securities for which we do not have the intent or ability to hold to maturity are classified as available for sale, and stated at fair value with unrealized gains and losses, net of income taxes included in the determination of comprehensive income and reported as a component of shareholders’ equity.
Loans Receivable and Allowance for Credit Losses
Consumer Loan Assignment. For legal purposes, a Consumer Loan is considered to have been assigned to us after the following has occurred:
•the consumer and Dealer have signed a Consumer Loan contract; and
•we have received the executed Consumer Loan contract and supporting documentation in either physical or electronic form.
For accounting and financial reporting purposes, a Consumer Loan is considered to have been assigned to us after the following has occurred:
•the Consumer Loan has been legally assigned to us; and
•we have made a funding decision and generally have provided funding to the Dealer in the form of either an advance under the Portfolio Program or one-time purchase payment under the Purchase Program.
Portfolio Segments and Classes. Our Loan portfolio consists of two portfolio segments: Dealer Loans and Purchased Loans. Our determination is based on the following:
•We have two financing programs: the Portfolio Program and the Purchase Program. We are considered to be a lender to our Dealers for Consumer Loans assigned under the Portfolio Program and a purchaser of Consumer Loans assigned under the Purchase Program.
•The Portfolio Program and the Purchase Program have different levels of risk in relation to credit losses. Under the Portfolio Program, the impact of negative variances in Consumer Loan performance is mitigated by Dealer Holdback and the cross-collateralization of Consumer Loan assignments. Under the Purchase Program, we are impacted by the full amount of negative variances in Consumer Loan performance.
•Our business model is narrowly focused on Consumer Loan assignments from one industry with expected cash flows that are significantly lower than the contractual cash flows owed to us due to credit quality. We do not believe that it is meaningful to disaggregate our Loan portfolio beyond the Dealer Loans and Purchased Loans portfolio segments.
Each portfolio segment consists of one class of Consumer Loan assignments, which is Consumer Loans originated by Dealers to finance purchases of vehicles and related ancillary products by consumers with impaired or limited credit histories. Our determination is based on the following:
•All of the Consumer Loans assigned to us have similar risk characteristics in relation to the categorization of borrowers, type of financing receivable, industry sector, and type of collateral.
•We only accept Consumer Loan assignments from Dealers located within the United States.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)
Recognition and Measurement Policies. On January 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. Loans outstanding prior to the adoption date qualified for transition relief and are accounted for as purchased financial assets with credit deterioration (“PCD Method”).
Under the PCD Method, for each reporting period subsequent to the adoption of CECL, we:
•recognize finance charge revenue using the effective interest rate that was calculated on the adoption date based on expected future net cash flows; and
•adjust the allowance for credit losses so that the net carrying amount of each Loan equals the present value of expected future net cash flows discounted at the effective interest rate. The adjustment to the allowance for credit losses is recognized as either provision for credit losses expense or a reversal of provision for credit losses expense.
Consumer Loans assigned to us on or subsequent to January 1, 2020 do not qualify for the PCD Method and are accounted for as originated financial assets (“Originated Method”). While the cash flows we expect to collect at the time of assignment are significantly lower than the contractual cash flows owed to us due to credit quality, our Loans do not qualify for the PCD Method because the assignment of the Consumer Loan to us occurs a moment after the Consumer Loan is originated by the Dealer, so “a more-than-insignificant deterioration in credit quality since origination” has not occurred at the time of assignment. In addition, Dealer Loans also do not qualify for the PCD Method because Consumer Loans assigned to us under the Portfolio Program are considered to be advances under Dealer Loans originated by us rather than Consumer Loans purchased by us.
Under the Originated Method, at the time of assignment, we:
•calculate the effective interest rate based on contractual future net cash flows;
•record a Loan receivable equal to the advance paid to the Dealer under the Portfolio Program or purchase price paid to the Dealer under the Purchase Program; and
•record an allowance for credit losses equal to the difference between the initial Loan receivable balance and the present value of expected future net cash flows discounted at the effective interest rate. The initial allowance for credit losses is recognized as provision for credit losses expense.
The effective interest rate and initial allowance for credit losses are significantly higher for Consumer Loans assigned under the Purchase Program than for Consumer Loans assigned under the Portfolio Program, as contractual net cash flows exceed expected net cash flows by a significantly greater margin under the Purchase Program. Under the Purchase Program, we retain all contractual collections that exceed our initial expectations. Under the Portfolio Program, contractual collections that exceed our initial expectations are substantially offset by additional Dealer Holdback payments.
Under the Originated Method, for each reporting period subsequent to assignment, we:
•recognize finance charge revenue using the effective interest rate that was calculated at the time of assignment based on contractual future net cash flows; and
•adjust the allowance for credit losses so that the net carrying amount of each Loan equals the present value of expected future net cash flows discounted at the effective interest rate. The adjustment to the allowance for credit losses is recognized as either provision for credit losses expense or a reversal of provision for credit losses expense.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)
Loans Receivable. Amounts advanced to Dealers for Consumer Loans assigned under the Portfolio Program are recorded as Dealer Loans and are aggregated by Dealer for purposes of recognizing revenue and measuring credit losses. Amounts paid to Dealers for Consumer Loans assigned under the Purchase Program are recorded as Purchased Loans and, for purposes of recognizing revenue and measuring credit losses, are:
•not aggregated, if assigned on or subsequent to January 1, 2020; or
•aggregated into pools based on the month of purchase, if assigned prior to January 1, 2020.
The outstanding balance of each Loan included in Loans receivable is comprised of the following:
•cash paid to the Dealer (or to third party ancillary product providers on the Dealer’s behalf) for the Consumer Loan assignment (advance under the Portfolio Program or one-time purchase payment under the Purchase Program);
•finance charges;
•Dealer Holdback payments;
•accelerated Dealer Holdback payments;
•recoveries;
•transfers in;
•less: collections (net of certain collection costs);
•less: write-offs; and
•less: transfers out.
Under our Portfolio Program, certain events may result in Dealers forfeiting their rights to Dealer Holdback. We transfer the Dealer’s outstanding Dealer Loan balance and the related allowance for credit losses balance to Purchased Loans in the period this forfeiture occurs. We aggregate these Purchased Loans by Dealer for purposes of recognizing revenue and measuring credit losses.
Allowance for Credit Losses. The outstanding balance of the allowance for credit losses of each Loan represents the amount required to reduce 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)
We fully write off the outstanding balances of a Loan and the related allowance for credit losses once we are no longer forecasting any expected future net cash flows on the Loan. Under our partial write-off policy, we write off the amount of the outstanding balances of a Loan and the related allowance for credit losses, if any, that exceeds 200% of the present value of expected future net cash flows on the Loan, as we deem this amount to be uncollectable.
Credit Quality. The vast majority of the Consumer Loans assigned to us are made to individuals with impaired or limited credit histories. Consumer Loans made to these individuals generally entail a higher risk of delinquency, default, and repossession and higher losses than loans made to consumers with better credit. Since most of our revenue and cash flows are generated from these Consumer Loans, our ability to accurately forecast Consumer Loan performance is critical to our business and financial results. At the time a Consumer Loan is submitted to us for assignment, we forecast future expected cash flows from the Consumer Loan. Based on these forecasts, an advance or one-time purchase payment is made to the related Dealer at a price designed to maximize our economic profit, a non-GAAP financial measure that considers our return on capital, our cost of capital, and the amount of capital invested.
We monitor and evaluate the credit quality of Consumer Loans 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.
When overall forecasted collection rates underperform our initial expectations, the decline in forecasted collections has a more adverse impact on the profitability of the Purchased Loans than on the profitability of the Dealer Loans. For Purchased Loans, the decline in forecasted collections is absorbed entirely by us. For Dealer Loans, the decline in the forecasted collections is substantially offset by a decline in forecasted payments of Dealer Holdback.
Methodology Changes. During the second quarter of 2023, we adjusted our methodology for forecasting the amount and timing of future net cash flows from our Loan portfolio through the utilization of more recent Consumer Loan performance and Consumer Loan prepayment data. During the first quarter of 2022, we removed the COVID forecast adjustment from our estimate of future net cash flows and enhanced our methodology for forecasting the amount and timing of future net cash flows from our Loan portfolio through the utilization of more recent data and new forecast variables. For additional information, see Note 6. For the three and six months ended June 30, 2023 and 2022, we did not make any other methodology changes for Loans that had a material impact on our financial statements.
Finance Charges
Sources of Revenue. Finance charges is comprised of: (1) interest income earned on Loans; (2) administrative fees earned from ancillary products; (3) program fees charged to Dealers under the Portfolio Program; (4) Consumer Loan assignment fees charged to Dealers; and (5) direct origination costs incurred on Dealer Loans.
We provide Dealers the ability to offer vehicle service contracts to consumers through our relationships with Third Party Providers (“TPPs”). A vehicle service contract provides the consumer protection by paying for the repair or replacement of certain components of the vehicle in the event of a mechanical failure. The retail price of the vehicle service contract is included in the principal balance of the Consumer Loan. The wholesale cost of the vehicle service contract is paid to the TPP, net of an administrative fee retained by us. The difference between the wholesale cost and the retail price to the consumer is paid to the Dealer as a commission. Under the Portfolio Program, the wholesale cost of the vehicle service contract and the commission paid to the Dealer are charged to the Dealer’s advance balance. TPPs process claims on vehicle service contracts that are underwritten by third party insurers. We bear the risk of loss for claims on certain vehicle service contracts that are reinsured by us. We market the vehicle service contracts directly to our Dealers.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)
We provide Dealers the ability to offer Guaranteed Asset Protection (“GAP”) to consumers through our relationships with TPPs. GAP provides the consumer protection by paying the difference between the loan balance and the amount covered by the consumer’s insurance policy in the event of a total loss of the vehicle due to severe damage or theft. The retail price of GAP is included in the principal balance of the Consumer Loan. The wholesale cost of GAP is paid to the TPP, net of an administrative fee retained by us. The difference between the wholesale cost and the retail price to the consumer is paid to the Dealer as a commission. Under the Portfolio Program, the wholesale cost of GAP and the commission paid to the Dealer are charged to the Dealer’s advance balance. TPPs process claims on GAP contracts that are underwritten by third party insurers.
Program fees represent monthly fees charged to Dealers for access to our Credit Approval Processing System (“CAPS”); administration, servicing, and collection services offered by us; documentation related to or affecting our program; and all tangible and intangible property owned by Credit Acceptance. We charge a monthly fee of $599 to Dealers participating in our Portfolio Program and we collect it from future Dealer Holdback payments.
Recognition Policy. 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 to January 1, 2020, the effective interest rate is based on contractual future net cash flows. For Consumer Loans assigned prior to January 1, 2020, the effective interest rate was determined based on expected future net cash flows.
We report the change in the present value of credit losses attributable to the passage of time as a reduction to finance charges. Accordingly, we allocate finance charges recognized on each Loan between the Loan receivable and the related allowance for credit losses. The amount of finance charges allocated to the Loan receivable is equal to the effective interest rate applied to the Loans receivable balance. The reduction of finance charges allocated to the allowance for credit losses is equal to the effective interest rate applied to the allowance for credit losses balance.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)
Reinsurance
VSC Re Company (“VSC Re”), our wholly owned subsidiary, is engaged in the business of reinsuring coverage under vehicle service contracts sold to consumers by Dealers on vehicles financed by us. VSC Re currently reinsures vehicle service contracts that are offered through one of our TPPs. Vehicle service contract premiums, which represent the selling price of the vehicle service contract to the consumer, less fees and certain administrative costs, are contributed to a trust account controlled by VSC Re. These premiums are used to fund claims covered under the vehicle service contracts. VSC Re is a bankruptcy remote entity. As such, our exposure to fund claims is limited to the trust assets controlled by VSC Re and our net investment in VSC Re.
Premiums from the reinsurance of vehicle service contracts are recognized over the life of the policy in proportion to expected costs of servicing those contracts. Expected costs are determined based on our historical claims experience. Claims are expensed through a provision for claims in the period the claim was incurred. Capitalized acquisition costs are comprised of premium taxes and are amortized as general and administrative expense over the life of the contracts in proportion to premiums earned.
We have consolidated the trust within our financial statements based on our determination of the following:
•We have a variable interest in the trust. We have a residual interest in the assets of the trust, which is variable in nature, given that it increases or decreases based upon the actual loss experience of the related service contracts. In addition, VSC Re is required to absorb any losses in excess of the trust’s assets.
•The trust is a variable interest entity. The trust has insufficient equity at risk as no parties to the trust were required to contribute assets that provide them with any ownership interest.
•We are the primary beneficiary of the trust. We control the amount of premiums written and placed in the trust through Consumer Loan assignments under our Programs, which is the activity that most significantly impacts the economic performance of the trust. We have the right to receive benefits from the trust that could potentially be significant. In addition, VSC Re has the obligation to absorb losses of the trust that could potentially be significant.
New Accounting Updates Adopted During the Current Year
Troubled Debt Restructurings and Vintage Disclosures. In March 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-02, which intends to improve the usefulness of information provided to investors about certain loan refinancings, restructurings, and write-offs. The adoption of ASU 2022-02 on January 1, 2023 expanded our write-off disclosures, but did not otherwise have a material impact on our consolidated financial statements.
Reference Rate Reform: Deferral of the Sunset Date. In December 2022, the FASB issued ASU 2022-06, which amends ASU 2020-04 to extend the period of time preparers can utilize the reference rate reform relief guidance during the phaseout of the London Interbank Offered Rate (“LIBOR”). ASU 2022-06 defers the sunset date of Topic 848 from December 31, 2022 to December 31, 2024. The adoption of ASU 2022-06 on January 1, 2023 did not have a material impact on our consolidated financial statements or related disclosures.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate their value.
Cash and Cash Equivalents and Restricted Cash and Cash Equivalents. The carrying amounts approximate their fair value due to the short maturity of these instruments.
Restricted Securities Available for Sale. The fair value of U.S. Government and agency securities and corporate bonds is based on quoted market values in active markets. For asset-backed securities, mortgage-backed securities, and commercial paper, we use model-based valuation techniques for which all significant assumptions are observable in the market.
Loans Receivable, net. The fair value is determined by calculating the present value of expected future net cash flows estimated by us by utilizing the discount rate used to calculate the value of our Loans under our non-GAAP floating yield methodology.
Revolving Secured Lines of Credit. The fair value is determined by calculating the present value of the debt instrument based on current rates for debt with a similar risk profile and maturity.
Secured Financing. The fair value of certain asset-backed secured financings (“Term ABS” financings) is determined using quoted market prices in an active market. For our warehouse facilities and certain other Term ABS financings, the fair values are determined by calculating the present value of each debt instrument based on current rates for debt with similar risk profiles and maturities.
Senior Notes. The fair value is determined using quoted market prices in an active market.
Mortgage Note. The fair value is determined by calculating the present value of the debt instrument based on current rates for debt with a similar risk profile and maturity.
A comparison of the carrying amount and estimated fair value of these financial instruments is as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. We group assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
Level 1
Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2
Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3
Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates or assumptions that market participants would use in pricing the asset or liability.
The following table provides the level of measurement used to determine the fair value for each of our financial instruments measured or disclosed at fair value:
(In millions)
As of June 30, 2023
Level 1
Level 2
Level 3
Total Fair Value
Assets
Cash and cash equivalents (1)
$
3.2
$
—
$
—
$
3.2
Restricted cash and cash equivalents (1)
408.8
—
—
408.8
Restricted securities available for sale (2)
65.4
16.0
—
81.4
Loans receivable, net (1)
—
—
7,274.0
7,274.0
Liabilities
Revolving secured lines of credit (1)
$
—
$
168.9
$
—
$
168.9
Secured financing (1)
2,942.8
800.1
—
3,742.9
Senior notes (1)
773.7
—
—
773.7
Mortgage note (1)
—
8.6
—
8.6
(In millions)
As of December 31, 2022
Level 1
Level 2
Level 3
Total Fair Value
Assets
Cash and cash equivalents (1)
$
7.7
$
—
$
—
$
7.7
Restricted cash and cash equivalents (1)
410.0
—
—
410.0
Restricted securities available for sale (2)
58.7
13.6
—
72.3
Loans receivable, net (1)
—
—
6,767.9
6,767.9
Liabilities
Revolving secured lines of credit (1)
$
—
$
30.9
$
—
$
30.9
Secured financing (1)
2,781.8
800.1
—
3,581.9
Senior notes (1)
759.0
—
—
759.0
Mortgage note (1)
—
8.9
—
8.9
(1)Measured at amortized cost with fair value disclosed.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)
5. RESTRICTED SECURITIES AVAILABLE FOR SALE
Restricted securities available for sale consist of the following:
(In millions)
As of June 30, 2023
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Estimated Fair Value
Corporate bonds
$
37.3
$
—
$
(1.6)
$
35.7
U.S. Government and agency securities
31.2
—
(1.5)
29.7
Asset-backed securities
16.2
—
(0.4)
15.8
Mortgage-backed securities
0.2
—
—
0.2
Total restricted securities available for sale
$
84.9
$
—
$
(3.5)
$
81.4
(In millions)
As of December 31, 2022
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Estimated Fair Value
Corporate bonds
$
32.6
$
—
$
(1.7)
$
30.9
U.S. Government and agency securities
29.5
—
(1.7)
27.8
Asset-backed securities
13.8
—
(0.4)
13.4
Mortgage-backed securities
0.2
—
—
0.2
Total restricted securities available for sale
$
76.1
$
—
$
(3.8)
$
72.3
The fair value and gross unrealized losses for restricted securities available for sale, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:
(In millions)
Securities Available for Sale with Gross Unrealized Losses as of June 30, 2023
Less than 12 Months
12 Months or More
Estimated Fair Value
Gross Unrealized Losses
Estimated Fair Value
Gross Unrealized Losses
Total Estimated Fair Value
Total Gross Unrealized Losses
Corporate bonds
$
21.3
$
(0.6)
$
11.4
$
(1.0)
$
32.7
$
(1.6)
U.S. Government and agency securities
21.5
(0.8)
7.6
(0.7)
29.1
(1.5)
Asset-backed securities
12.5
(0.2)
3.3
(0.2)
15.8
(0.4)
Mortgage-backed securities
0.2
—
—
—
0.2
—
Total restricted securities available for sale
$
55.5
$
(1.6)
$
22.3
$
(1.9)
$
77.8
$
(3.5)
(In millions)
Securities Available for Sale with Gross Unrealized Losses as of December 31, 2022
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)
The cost and estimated fair values of debt securities by contractual maturity were as follows (securities with multiple maturity dates are classified in the period of final maturity). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
(In millions)
As of
June 30, 2023
December 31, 2022
Contractual Maturity
Amortized Cost
Estimated Fair Value
Amortized Cost
Estimated Fair Value
Within one year
$
7.4
$
7.2
$
4.0
$
3.9
Over one year to five years
70.8
67.6
66.4
63.0
Over five years to ten years
6.6
6.5
5.6
5.3
Over ten years
0.1
0.1
0.1
0.1
Total restricted securities available for sale
$
84.9
$
81.4
$
76.1
$
72.3
6. LOANS RECEIVABLE
Loans receivable and allowance for credit losses consist of the following:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)
For the Six Months Ended June 30, 2023
(In millions)
Loans Receivable
Allowance for Credit Losses
Loans Receivable, Net
Dealer Loans
Purchased Loans
Total
Dealer Loans
Purchased Loans
Total
Dealer Loans
Purchased Loans
Total
Balance, beginning of period
$
6,074.8
$
3,090.7
$
9,165.5
$
(2,000.0)
$
(867.8)
$
(2,867.8)
$
4,074.8
$
2,222.9
$
6,297.7
Finance charges
755.8
467.0
1,222.8
(250.7)
(110.0)
(360.7)
505.1
357.0
862.1
Provision for credit losses
—
—
—
(219.3)
(168.6)
(387.9)
(219.3)
(168.6)
(387.9)
New Consumer Loan assignments (1)
1,470.4
680.9
2,151.3
—
—
—
1,470.4
680.9
2,151.3
Collections (2)
(1,601.5)
(860.2)
(2,461.7)
—
—
—
(1,601.5)
(860.2)
(2,461.7)
Accelerated Dealer Holdback payments
24.6
—
24.6
—
—
—
24.6
—
24.6
Dealer Holdback payments
118.3
—
118.3
—
—
—
118.3
—
118.3
Transfers (3)
(51.6)
51.6
—
19.0
(19.0)
—
(32.6)
32.6
—
Write-offs
(263.5)
(366.5)
(630.0)
263.5
366.5
630.0
—
—
—
Recoveries (4)
0.9
2.0
2.9
(0.9)
(2.0)
(2.9)
—
—
—
Deferral of Loan origination costs
5.9
—
5.9
—
—
—
5.9
—
5.9
Balance, end of period
$
6,534.1
$
3,065.5
$
9,599.6
$
(2,188.4)
$
(800.9)
$
(2,989.3)
$
4,345.7
$
2,264.6
$
6,610.3
For the Six Months Ended June 30, 2022
(In millions)
Loans Receivable
Allowance for Credit Losses
Loans Receivable, Net
Dealer Loans
Purchased Loans
Total
Dealer Loans
Purchased Loans
Total
Dealer Loans
Purchased Loans
Total
Balance, beginning of period
$
5,655.1
$
3,694.7
$
9,349.8
$
(1,767.8)
$
(1,245.7)
$
(3,013.5)
$
3,887.3
$
2,449.0
$
6,336.3
Finance charges
679.3
519.8
1,199.1
(212.0)
(137.4)
(349.4)
467.3
382.4
849.7
Provision for credit losses
—
—
—
(74.8)
(96.0)
(170.8)
(74.8)
(96.0)
(170.8)
New Consumer Loan assignments (1)
1,320.0
578.4
1,898.4
—
—
—
1,320.0
578.4
1,898.4
Collections (2)
(1,698.8)
(1,010.8)
(2,709.6)
—
—
—
(1,698.8)
(1,010.8)
(2,709.6)
Accelerated Dealer Holdback payments
24.9
—
24.9
—
—
—
24.9
—
24.9
Dealer Holdback payments
90.4
—
90.4
—
—
—
90.4
—
90.4
Transfers (3)
(43.2)
43.2
—
10.6
(10.6)
—
(32.6)
32.6
—
Write-offs
(199.7)
(469.1)
(668.8)
199.7
469.1
668.8
—
—
—
Recoveries (4)
0.5
1.5
2.0
(0.5)
(1.5)
(2.0)
—
—
—
Deferral of Loan origination costs
4.4
—
4.4
—
—
—
4.4
—
4.4
Balance, end of period
$
5,832.9
$
3,357.7
$
9,190.6
$
(1,844.8)
$
(1,022.1)
$
(2,866.9)
$
3,988.1
$
2,335.6
$
6,323.7
(1)The Dealer Loans amount represents advances paid to Dealers on Consumer Loans assigned under our Portfolio Program. The Purchased Loans amount represents one-time payments made to Dealers to purchase Consumer Loans assigned under our Purchase Program.
(2)Represents repayments that we collected on Consumer Loans assigned under our programs.
(3)Under our Portfolio Program, certain events may result in Dealers forfeiting their rights to Dealer Holdback. We transfer the Dealer’s outstanding Dealer Loan balance and related allowance for credit losses balance to Purchased Loans in the period this forfeiture occurs.
(4)The Dealer Loans amount represents net cash flows received (collections less any related Dealer Holdback payments) on Dealer Loans that were previously written off in full. The Purchased Loans amount represents collections received on Purchased Loans that were previously written off in full.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)
We recognize provision for credit losses on new Consumer Loan assignments for contractual net cash flows that were not expected to be realized at the time of assignment. We also recognize provision for credit losses on forecast changes in the amount and timing of expected future net cash flows subsequent to assignment. The following table summarizes the provision for credit losses for each of these components:
(In millions)
For the Three Months Ended June 30, 2023
Provision for Credit Losses
Dealer Loans
Purchased Loans
Total
New Consumer Loan assignments
$
33.8
$
47.9
$
81.7
Forecast changes
110.8
58.0
168.8
Total
$
144.6
$
105.9
$
250.5
(In millions)
For the Three Months Ended June 30, 2022
Provision for Credit Losses
Dealer Loans
Purchased Loans
Total
New Consumer Loan assignments
$
45.6
$
51.9
$
97.5
Forecast changes
27.7
22.3
50.0
Total
$
73.3
$
74.2
$
147.5
(In millions)
For the Six Months Ended June 30, 2023
Provision for Credit Losses
Dealer Loans
Purchased Loans
Total
New Consumer Loan assignments
$
71.5
$
103.3
$
174.8
Forecast changes
147.8
65.3
213.1
Total
$
219.3
$
168.6
$
387.9
(In millions)
For the Six Months Ended June 30, 2022
Provision for Credit Losses
Dealer Loans
Purchased Loans
Total
New Consumer Loan assignments
$
93.1
$
107.0
$
200.1
Forecast changes
(18.3)
(11.0)
(29.3)
Total
$
74.8
$
96.0
$
170.8
The net Loan income (finance charge revenue less provision for credit losses expense) that we will 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. Under CECL, we are required 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. Additional information related to new Consumer Loan assignments is as follows:
(In millions)
For the Three Months Ended June 30, 2023
New Consumer Loan Assignments
Dealer Loans
Purchased Loans
Total
Contractual net cash flows at the time of assignment (1)
$
1,121.5
$
657.6
$
1,779.1
Expected net cash flows at the time of assignment (2)
1,018.9
461.3
1,480.2
Loans receivable at the time of assignment (3)
724.5
331.5
1,056.0
Provision for credit losses expense at the time of assignment
$
(33.8)
$
(47.9)
$
(81.7)
Expected future finance charges at the time of assignment (4)
328.2
177.7
505.9
Expected net Loan income at the time of assignment (5)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)
(In millions)
For the Three Months Ended June 30, 2022
New Consumer Loan Assignments
Dealer Loans
Purchased Loans
Total
Contractual net cash flows at the time of assignment (1)
$
1,045.4
$
572.3
$
1,617.7
Expected net cash flows at the time of assignment (2)
951.4
393.4
1,344.8
Loans receivable at the time of assignment (3)
686.2
288.7
974.9
Provision for credit losses expense at the time of assignment
$
(45.6)
$
(51.9)
$
(97.5)
Expected future finance charges at the time of assignment (4)
310.8
156.6
467.4
Expected net Loan income at the time of assignment (5)
$
265.2
$
104.7
$
369.9
(In millions)
For the Six Months Ended June 30, 2023
New Consumer Loan Assignments
Dealer Loans
Purchased Loans
Total
Contractual net cash flows at the time of assignment (1)
$
2,294.3
$
1,371.2
$
3,665.5
Expected net cash flows at the time of assignment (2)
2,083.0
950.1
3,033.1
Loans receivable at the time of assignment (3)
1,470.4
680.9
2,151.3
Provision for credit losses expense at the time of assignment
$
(71.5)
$
(103.3)
$
(174.8)
Expected future finance charges at the time of assignment (4)
684.1
372.5
1,056.6
Expected net Loan income at the time of assignment (5)
$
612.6
$
269.2
$
881.8
(In millions)
For the Six Months Ended June 30, 2022
New Consumer Loan Assignments
Dealer Loans
Purchased Loans
Total
Contractual net cash flows at the time of assignment (1)
$
2,017.2
$
1,150.1
$
3,167.3
Expected net cash flows at the time of assignment (2)
1,830.8
784.7
2,615.5
Loans receivable at the time of assignment (3)
1,320.0
578.4
1,898.4
Provision for credit losses expense at the time of assignment
$
(93.1)
$
(107.0)
$
(200.1)
Expected future finance charges at the time of assignment (4)
603.9
313.3
917.2
Expected net Loan income at the time of assignment (5)
$
510.8
$
206.3
$
717.1
(1)The Dealer Loans amount represents repayments that we were contractually owed at the time of assignment on Consumer Loans assigned under our Portfolio Program, less the related Dealer Holdback payments that we would be required to make if we collected all of the contractual repayments. The Purchased Loans amount represents repayments that we were contractually owed at the time of assignment on Consumer Loans assigned under our Purchase Program.
(2)The Dealer Loans amount represents repayments that we expected to collect at the time of assignment on Consumer Loans assigned under our Portfolio Program, less the related Dealer Holdback payments that we expected to make. The Purchased Loans amount represents repayments that we expected to collect at the time of assignment on Consumer Loans assigned under our Purchase Program. The Loan amounts also represent the fair value at the time of assignment.
(3)The Dealer Loans amount represents advances paid to Dealers on Consumer Loans assigned under our Portfolio Program. The Purchased Loans amount represents one-time payments made to Dealers to purchase Consumer Loans assigned under our Purchase Program.
(4)Represents revenue that is expected to be recognized on a level-yield basis over the lives of the Loans.
(5)Represents the amount that expected net cash flows at the time of assignment (2) exceed Loans receivable at the time of assignment (3).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)
A summary of changes in expected future net cash flows is as follows:
(In millions)
For the Three Months Ended June 30, 2023
Expected Future Net Cash Flows
Dealer Loans
Purchased Loans
Total
Balance, beginning of period
$
5,935.7
$
3,484.6
$
9,420.3
New Consumer Loan assignments (1)
1,018.9
461.3
1,480.2
Realized net cash flows (2)
(718.0)
(421.8)
(1,139.8)
Forecast changes
(41.8)
(47.5)
(89.3)
Transfers (3)
(28.4)
33.3
4.9
Balance, end of period
$
6,166.4
$
3,509.9
$
9,676.3
(In millions)
For the Three Months Ended June 30, 2022
Expected Future Net Cash Flows
Dealer Loans
Purchased Loans
Total
Balance, beginning of period
$
5,321.3
$
3,675.9
$
8,997.2
New Consumer Loan assignments (1)
951.4
393.4
1,344.8
Realized net cash flows (2)
(770.1)
(488.6)
(1,258.7)
Forecast changes
(14.0)
(29.4)
(43.4)
Transfers (3)
(20.0)
22.3
2.3
Balance, end of period
$
5,468.6
$
3,573.6
$
9,042.2
(In millions)
For the Six Months Ended June 30, 2023
Expected Future Net Cash Flows
Dealer Loans
Purchased Loans
Total
Balance, beginning of period
$
5,637.9
$
3,395.5
$
9,033.4
New Consumer Loan assignments (1)
2,083.0
950.1
3,033.1
Realized net cash flows (2)
(1,458.6)
(860.2)
(2,318.8)
Forecast changes
(49.0)
(30.9)
(79.9)
Transfers (3)
(46.9)
55.4
8.5
Balance, end of period
$
6,166.4
$
3,509.9
$
9,676.3
(In millions)
For the Six Months Ended June 30, 2022
Expected Future Net Cash Flows
Dealer Loans
Purchased Loans
Total
Balance, beginning of period
$
5,249.7
$
3,698.6
$
8,948.3
New Consumer Loan assignments (1)
1,830.8
784.7
2,615.5
Realized net cash flows (2)
(1,583.5)
(1,010.8)
(2,594.3)
Forecast changes
19.9
46.9
66.8
Transfers (3)
(48.3)
54.2
5.9
Balance, end of period
$
5,468.6
$
3,573.6
$
9,042.2
(1)The Dealer Loans amount represents repayments that we expected to collect at the time of assignment on Consumer Loans assigned under our Portfolio Program, less the related Dealer Holdback payments that we expected to make. The Purchased Loans amount represents repayments that we expected to collect at the time of assignment on Consumer Loans assigned under our Purchase Program.
(2)The Dealer Loans amount represents repayments that we collected on Consumer Loans assigned under our Portfolio Program, less the Dealer Holdback and Accelerated Dealer Holdback payments that we made. Purchased Loans amount represents repayments that we collected on Consumer Loans assigned under our Purchase Program.
(3)Under our Portfolio Program, certain events may result in Dealers forfeiting their rights to Dealer Holdback. We transfer the Dealer’s outstanding Dealer Loan balance, related allowance for credit losses balance, and related expected future net cash flows to Purchased Loans in the period this forfeiture occurs.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)
Credit Quality
We monitor and evaluate the credit quality of Consumer Loans assigned under our Portfolio and Purchase Programs on a monthly basis by comparing our current forecasted collection rates to our prior forecasted collection rates and our initial expectations. For additional information regarding credit quality, see Note 3.
The following table compares our forecast of Consumer Loan collection rates as of June 30, 2023 with the forecasts as of March 31, 2023, December 31, 2022, and at the time of assignment, segmented by year of assignment:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)
Purchased Loans
Forecasted Collection Percentage as of (1) (2)
Current Forecast Variance from
Consumer Loan Assignment Year
June 30, 2023
March 31, 2023
December 31, 2022
Initial Forecast
March 31, 2023
December 31, 2022
Initial Forecast
2014
72.5
%
72.5
%
72.5
%
70.9
%
0.0
%
0.0
%
1.6
%
2015
68.9
%
68.9
%
68.9
%
68.5
%
0.0
%
0.0
%
0.4
%
2016
66.0
%
66.0
%
66.0
%
66.5
%
0.0
%
0.0
%
-0.5
%
2017
66.3
%
66.3
%
66.3
%
64.6
%
0.0
%
0.0
%
1.7
%
2018
66.7
%
66.6
%
66.4
%
63.5
%
0.1
%
0.3
%
3.2
%
2019
67.5
%
67.5
%
67.2
%
64.2
%
0.0
%
0.3
%
3.3
%
2020
68.0
%
68.1
%
68.0
%
63.6
%
-0.1
%
0.0
%
4.4
%
2021
66.0
%
66.5
%
66.7
%
66.3
%
-0.5
%
-0.7
%
-0.3
%
2022
65.7
%
67.4
%
67.4
%
68.0
%
-1.7
%
-1.7
%
-2.3
%
2023
69.2
%
68.2
%
—
68.8
%
1.0
%
—
0.4
%
(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.
(2)The forecasted collection rates presented for Dealer Loans and Purchased Loans reflect the Consumer Loan classification at the time of assignment.
We evaluate and adjust the expected collection rate of each Consumer Loan subsequent to assignment primarily through the monitoring of consumer payment behavior. The following table summarizes the past-due status of Consumer Loan assignments as of June 30, 2023 and December 31, 2022, segmented by year of assignment:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)
(1)As Consumer Loans are aggregated by Dealer for purposes of recognizing revenue and measuring credit losses, the Dealer Loan amount was estimated by allocating the balance of each Dealer Loan to the underlying Consumer Loans based on the forecasted future collections of each Consumer Loan.
(2)As certain Consumer Loans are aggregated by Dealer or month of purchase for purposes of recognizing revenue and measuring credit losses, the Purchased Loan amount was estimated by allocating the balance of certain Purchased Loans to the underlying Consumer Loans based on the forecasted future collections of each Consumer Loan.
(3)Represents the Loan balance attributable to Consumer Loans outstanding within their initial loan terms.
(4)Represents the Loan balance attributable to Consumer Loans outstanding beyond their initial loan terms.
(5)We consider a Consumer Loan to be current for purposes of forecasting expected collection rates if contractual repayments are less than 11 days past due.
The following table summarizes the write-offs for Consumer Loan assignments for the three and six months ended June 30, 2023, segmented by year of assignment:
(In millions)
For the Three Months Ended June 30, 2023
Write-offs by Consumer Loan Assignment Year
Dealer Loans
Purchased Loans
Total
2018 and prior
$
33.9
$
28.0
$
61.9
2019
27.1
50.8
77.9
2020
27.6
26.1
53.7
2021
26.6
29.2
55.8
2022
27.3
40.1
67.4
2023
3.3
9.4
12.7
$
145.8
$
183.6
$
329.4
(In millions)
For the Six Months Ended June 30, 2023
Write-offs by Consumer Loan Assignment Year
Dealer Loans
Purchased Loans
Total
2018 and prior
$
65.5
$
59.5
$
125.0
2019
50.8
99.1
149.9
2020
51.3
54.9
106.2
2021
45.4
62.2
107.6
2022
46.3
80.4
126.7
2023
4.2
10.4
14.6
$
263.5
$
366.5
$
630.0
During the second quarter of 2023, we adjusted our methodology for forecasting the amount and timing of future net cash flows from our Loan portfolio through the utilization of more recent Consumer Loan performance and Consumer Loan prepayment data. During the first half of 2023, we experienced a decrease in Consumer Loan prepayments to below-average levels and as a result, slowed our forecasted net cash flow timing. Historically, Consumer Loan prepayments have been lower in periods with less availability of consumer credit. Changes in the amount and timing of forecasted net cash flows are recognized in the period of change through provision for credit losses. The implementation of the adjustment to our forecasting methodology during the second quarter of 2023 reduced forecasted net cash flows by $44.5 million, or 0.5%, and increased provision for credit losses by $71.3 million.
The COVID-19 pandemic created conditions that increased the level of uncertainty associated with our estimate of the amount and timing of future net cash flows from our Loan portfolio. During the first quarter of 2020, we applied a subjective adjustment to our forecasting model to reflect our best estimate of the future impact of the COVID-19 pandemic on future net cash flows (“COVID forecast adjustment”), which reduced our estimate of future net cash flows by $162.2 million. We continued to apply the COVID forecast adjustment through the end of 2021 as it continued to represent our best estimate. During the first quarter of 2022, we determined that we had sufficient Consumer Loan performance experience since the lapse of federal stimulus payments and enhanced unemployment benefits to refine our estimate of future net cash flows. Accordingly, during the first quarter of 2022, we removed the COVID forecast adjustment and enhanced our methodology for forecasting the amount and timing of future net cash flows from our Loan portfolio through the utilization of more recent data and new forecast variables.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)
The removal of the COVID forecast adjustment and the implementation of the enhanced forecasting methodology during the first quarter of 2022 impacted forecasted net cash flows and provision for credit losses as follows:
(In millions)
Increase / (Decrease) in
Forecasting Methodology Changes
Forecasted Net Cash Flows
Provision for Credit Losses
Removal of COVID forecast adjustment
$
149.5
$
(118.5)
Implementation of enhanced forecasting methodology
(53.8)
47.9
Total
$
95.7
$
(70.6)
7. REINSURANCE
A summary of reinsurance activity is as follows:
(In millions)
For the Three Months Ended June 30,
For the Six Months Ended June 30,
2023
2022
2023
2022
Net assumed written premiums
$
23.5
$
19.1
$
48.9
$
36.8
Net premiums earned
19.8
15.4
37.2
29.2
Provision for claims
19.7
12.2
37.6
21.1
Amortization of capitalized acquisition costs
0.5
0.4
1.0
0.8
The trust assets and related reinsurance liabilities are as follows:
(In millions)
As of
Balance Sheet Location
June 30, 2023
December 31, 2022
Trust assets
Restricted cash and cash equivalents
$
1.0
$
0.4
Trust assets
Restricted securities available for sale
81.4
72.3
Unearned premium
Accounts payable and accrued liabilities
66.1
54.4
Claims reserve (1)
Accounts payable and accrued liabilities
6.3
3.1
(1) The claims reserve represents our liability for incurred-but-not-reported claims and is estimated based on historical claims experience.
8. OTHER INCOME
Other income consists of the following:
(In millions)
For the Three Months Ended June 30,
For the Six Months Ended June 30,
2023
2022
2023
2022
Ancillary product profit sharing
$
9.1
$
12.9
$
16.6
$
27.6
Interest
4.9
0.7
9.0
1.0
Remarketing fees
2.7
1.9
5.7
3.9
Other
0.4
0.9
1.1
1.7
Total
$
17.1
$
16.4
$
32.4
$
34.2
Ancillary product profit sharing consists of payments received from TPPs based upon the performance of vehicle service contracts and GAP contracts, and is recognized as income over the life of the vehicle service contracts and GAP contracts.
Interest consists of income earned on cash and cash equivalents, restricted cash and cash equivalents, and restricted securities available for sale. Interest income is generally recognized over time as it is earned. Interest income on restricted securities available for sale is recognized over the life of the underlying financial instruments using the interest method.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)
Remarketing fees consist of fees retained from the sale of repossessed vehicles by Vehicle Remarketing Services, Inc. (“VRS”), our wholly owned subsidiary that is responsible for remarketing vehicles for Credit Acceptance. VRS coordinates vehicle repossessions with a nationwide network of repossession contractors, the redemption of the vehicles by the consumers, and the sale of the vehicles through a nationwide network of vehicle auctions. VRS recognizes income from the retained fees at the time of the sale and does not retain a fee if a repossessed vehicle is redeemed by the consumer prior to the sale.
The following table disaggregates our other income by major source of income and timing of the revenue recognition:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)
9. DEBT
Debt consists of the following:
(In millions)
As of June 30, 2023
Principal Outstanding
Unamortized Debt Issuance Costs
Unamortized Discount
Carrying Amount
Revolving secured lines of credit (1)
$
168.9
$
—
$
—
$
168.9
Secured financing (2)
3,796.6
(19.5)
(2.9)
3,774.2
Senior notes
800.0
(5.1)
—
794.9
Mortgage note
8.6
—
—
8.6
Total debt
$
4,774.1
$
(24.6)
$
(2.9)
$
4,746.6
(In millions)
As of December 31, 2022
Principal Outstanding
Unamortized Debt Issuance Costs
Unamortized Discount
Carrying Amount
Revolving secured lines of credit (1)
$
30.9
$
—
$
—
$
30.9
Secured financing (2)
3,776.7
(16.9)
(3.4)
3,756.4
Senior notes
800.0
(5.5)
—
794.5
Mortgage note
8.9
—
—
8.9
Total debt
$
4,616.5
$
(22.4)
$
(3.4)
$
4,590.7
(1)Excludes deferred debt issuance costs of $4.9 million and $3.9 million as of June 30, 2023 and December 31, 2022, respectively, which are included in other assets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)
General information for each of our financing transactions in place as of June 30, 2023 is as follows:
(Dollars in millions)
Financings
Wholly Owned Subsidiary
Maturity Date
Financing Amount
Interest Rate Basis as of June 30, 2023
Revolving Secured Line of Credit Facility
n/a
06/22/2026
$
390.0
At our option, either the Bloomberg Short-Term Bank Yield Index rate (BSBY) plus 187.5 basis points or the prime rate plus 87.5 basis points
RTP Facility
n/a
—
(1)
$
20.0
BSBY plus 187.5 basis points
Warehouse Facility II (2)
CAC Warehouse Funding LLC II
04/30/2026
(3)
400.0
The Secured Overnight Financing Rate (SOFR) plus 230 basis points (4)
Warehouse Facility IV (2)
CAC Warehouse Funding LLC IV
05/20/2025
(3)
300.0
SOFR plus 221.4 basis points (4)
Warehouse Facility V (2)
CAC Warehouse Funding LLC V
12/29/2025
(5)
200.0
SOFR plus 245 basis points (4)
Warehouse Facility VI (2)
CAC Warehouse Funding LLC VI
09/30/2024
(3)
75.0
BSBY plus 200 basis points
Warehouse Facility VIII (2)
CAC Warehouse Funding LLC VIII
09/01/2024
(3)
200.0
SOFR plus 201.4 basis points (4)
Term ABS 2019-2 (2)
Credit Acceptance Funding LLC 2019-2
08/15/2025
(6)
500.0
Fixed rate
Term ABS 2020-2 (2)
Credit Acceptance Funding LLC 2020-2
07/15/2022
(3)
481.8
Fixed rate
Term ABS 2020-3 (2)
Credit Acceptance Funding LLC 2020-3
10/17/2022
(3)
600.0
Fixed rate
Term ABS 2021-1 (2)
Credit Acceptance Funding LLC 2021-1
12/16/2024
(6)
100.0
SOFR plus 220 basis points (4)
Term ABS 2021-2 (2)
Credit Acceptance Funding LLC 2021-2
02/15/2023
(3)
500.0
Fixed rate
Term ABS 2021-3 (2)
Credit Acceptance Funding LLC 2021-3
05/15/2023
(3)
450.0
Fixed rate
Term ABS 2021-4 (2)
Credit Acceptance Funding LLC 2021-4
10/16/2023
(3)
250.1
Fixed rate
Term ABS 2022-1 (2)
Credit Acceptance Funding LLC 2022-1
06/17/2024
(3)
350.0
Fixed rate
Term ABS 2022-2 (2)
Credit Acceptance Funding LLC 2022-2
12/15/2025
(6)
200.0
SOFR plus 235 basis points (4)
Term ABS 2022-3 (2)
Credit Acceptance Funding LLC 2022-3
10/15/2024
(3)
389.9
Fixed rate
Term ABS 2023-1 (2)
Credit Acceptance Funding LLC 2023-1
03/17/2025
(3)
400.0
Fixed rate
Term ABS 2023-2 (2)
Credit Acceptance Funding LLC 2023-2
5/15/2025
(3)
$
400.0
Fixed rate
2024 Senior Notes
n/a
12/31/2024
400.0
Fixed rate
2026 Senior Notes
n/a
03/15/2026
400.0
Fixed rate
Mortgage Note (2)
Chapter 4 Properties, LLC
08/06/2028
9.0
BSBY plus 150 basis points
(1)Borrowings are subject to repayment on demand.
(2)Financing made available only to a specified subsidiary of the Company.
(3)Represents the revolving maturity date. The outstanding balance will amortize after the revolving maturity date based on the cash flows of the pledged assets.
(4)Interest rate cap agreements are in place to limit the exposure to increasing interest rates.
(5)Represents the revolving maturity date. The outstanding balance will amortize after the revolving maturity date and any amounts remaining on December 27, 2027 will be due on that date.
(6)Represents the revolving maturity date. The Company has the option to redeem and retire the indebtedness after the revolving maturity date. If we do not elect this option, the outstanding balance will amortize based on the cash flows of the pledged assets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)
Term ABS 2022-3
Principal balance outstanding
$
389.9
$
389.9
Loans pledged as collateral
418.3
429.2
Restricted cash and cash equivalents pledged as collateral
29.5
27.6
Interest rate
7.68
%
7.68
%
Term ABS 2023-1
Principal balance outstanding
$
400.0
$
—
Loans pledged as collateral
625.7
—
Restricted cash and cash equivalents pledged as collateral
39.4
—
Interest rate
6.92
%
—
%
Term ABS 2023-2
Principal balance outstanding
$
400.0
$
—
Loans pledged as collateral
638.8
—
Restricted cash and cash equivalents pledged as collateral
38.7
—
Interest rate
6.39
%
—
%
2024 Senior Notes
Principal balance outstanding
$
400.0
$
400.0
Interest rate
5.125
%
5.125
%
2026 Senior Notes
Principal balance outstanding
$
400.0
$
400.0
Interest rate
6.625
%
6.625
%
Mortgage Note
Principal balance outstanding
$
8.6
$
8.9
Interest rate
6.60
%
5.46
%
(1)Availability may be limited by the amount of assets pledged as collateral.
Revolving Secured Lines of Credit
We have two revolving secured lines of credit: (1) a $390.0 million revolving secured line of credit facility, to which we refer as our revolving secured line of credit facility, with a commercial bank syndicate and (2) an uncommitted $20.0 million revolving secured line of credit facility, to which we refer as the RTP facility, with a lender for use solely in facilitating payments by the Company through the lender’s real-time payments service.
Borrowings under our revolving secured line of credit facility, including any letters of credit issued under the facility, are subject to a borrowing-base limitation. This limitation equals 80% of the value of Loans, as defined in the agreement governing our revolving secured line of credit facility, less a hedging reserve (not exceeding $1.0 million), and the amount of other debt secured by the collateral that secures our revolving secured line of credit facility. Borrowings under our revolving secured line of credit facility are secured by a lien on most of our assets.
We entered into the RTP facility on May 3, 2023. Borrowings under the RTP facility are secured by a lien on the same collateral that secures obligations under our revolving secured line of credit facility. The RTP facility terminates automatically if the lender ceases to be part of the commercial bank syndicate under our revolving secured line of credit facility or if its lending commitments under our revolving secured line of credit facility are terminated.
Warehouse Facilities
We have five Warehouse facilities with total borrowing capacity of $1,175.0 million. Each of the facilities is with a different lender or group of lenders. Under each Warehouse facility, we can convey Loans to the applicable wholly owned subsidiary in return for cash and/or an increase in the value of our equity in such subsidiary. In turn, each such subsidiary pledges the Loans as collateral to secure financing that will fund the cash portion of the purchase price of the Loans. The financing provided to each such subsidiary under the applicable facility is generally limited to the lesser of 80% of the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)
outstanding balance of the conveyed Loans, as determined in accordance with the applicable agreement, plus certain restricted cash and cash equivalents pledged as collateral, or the facility limit.
The financings create indebtedness for which the subsidiaries are liable and which is secured by all the assets of each subsidiary. Such indebtedness is non-recourse to us (other than customary, limited recourse to us in the form of repurchase obligations or indemnification obligations for any violations by us of our representations or obligations as seller, servicer, or custodian), even though we are consolidated for financial reporting purposes with the subsidiaries. Because the subsidiaries are organized as bankruptcy-remote legal entities separate from us, their assets (including the conveyed Loans) are intended to be unavailable to our creditors.
The subsidiaries pay us a monthly servicing fee equal to either 4% or 6%, depending upon the facility, of the collections received with respect to the conveyed Loans. The servicing fee is paid out of the collections. Except for the servicing fee and holdback payments due to Dealers, if a facility is amortizing, we do not have any rights in any portion of such collections until all outstanding principal, accrued and unpaid interest, fees, and other related costs have been paid in full. If a facility is in its revolving period, the applicable subsidiary is entitled to the portion of such collections available after the payment of interest and transaction expenses under the facility, provided that the borrowing base requirements of the facility are satisfied.
Term ABS Financings
We have wholly owned subsidiaries (the “Funding LLCs”) that have completed secured financing transactions with qualified institutional investors or lenders. In connection with each of these transactions, we conveyed Loans on an arms-length basis to a Funding LLC for cash and the sole membership interest in that Funding LLC. In turn, each Funding LLC, other than the Funding LLCs for the Term ABS 2019-2, 2021-1, and 2022-2 financings, conveyed the Loans to the respective trusts that issued notes to qualified institutional investors. The Funding LLCs for the Term ABS 2019-2, 2021-1, and 2022-2 financings pledged the Loans for the benefit of their respective lenders. The Term ABS 2020-2, 2020-3, 2021-2, 2021-3, 2021-4, 2023-1, and 2023-2 financings each consist of three classes of notes, while the Term ABS 2022-1 and Term ABS 2022-3 financings consist of four classes of notes.
Each Term ABS financing at the time of issuance has a specified revolving period during which we are likely to convey additional Loans to the applicable Funding LLC. Each Funding LLC (other than the Funding LLCs of the Term ABS 2019-2, 2021-1, and 2022-2 financings) will then convey the Loans to its respective trust. At the end of the applicable revolving period, the debt outstanding under each financing will begin to amortize.
The Term ABS financings create indebtedness for which the applicable trust or Funding LLC is liable and which is secured by all the assets of the applicable trust or Funding LLC. Such indebtedness is non-recourse to us (other than customary, limited recourse to us in the form of repurchase obligations or indemnification obligations for any violations by us of our representations or obligations as seller, servicer, or custodian), even though we are consolidated for financial reporting purposes with the trusts and the Funding LLCs. Because the trusts and the Funding LLCs are organized as bankruptcy-remote legal entities separate from us, their assets (including the conveyed Loans) are intended to be unavailable to our creditors. We receive a monthly servicing fee on each financing equal to either 4% or 6%, depending upon the financing, of the collections received with respect to the conveyed Loans. The fee is paid out of the collections. Except for the servicing fee and Dealer Holdback payments due to Dealers, if a Term ABS financing is amortizing, we do not have any rights in any portion of such collections until all outstanding principal, accrued and unpaid interest, fees, and other related costs have been paid in full. If a Term ABS financing is in its revolving period, the applicable trust or Funding LLC is entitled to the portion of such collections available after application of any amounts necessary to acquire additional Loans from us and to pay accrued interest on the debt and any other transaction expenses, provided that any necessary principal payments are made to compensate for certain reductions in the balance of eligible loans or, in the case of Term ABS financings occurring after the Term ABS 2021-3 financing, certain reductions in forecasted collections. In addition, in our capacity as servicer of the Loans, we have a limited right to exercise a “clean-up call” option to purchase Loans from the Funding LLCs and/or the trusts under certain specified circumstances. For those Funding LLCs with a trust, when the trust’s indebtedness is paid in full, either through collections or through a prepayment of the indebtedness, the trust is to pay any remaining collections over to its Funding LLC as the sole beneficiary of the trust. For all Funding LLCs, after the indebtedness is paid in full, any remaining collections will ultimately be available to be distributed to us as the sole member of the respective Funding LLC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)
The table below sets forth certain additional details regarding the outstanding Term ABS financings:
(Dollars in millions)
Term ABS Financings
Close Date
Net Book Value of Loans Conveyed at Closing
Revolving Period
Term ABS 2019-2
August 28, 2019
$
625.1
Through August 15, 2025
Term ABS 2020-2
July 23, 2020
602.3
Through July 15, 2022
Term ABS 2020-3
October 22, 2020
750.1
Through October 17, 2022
Term ABS 2021-1
January 29, 2021
125.1
Through December 16, 2024
Term ABS 2021-2
February 18, 2021
625.1
Through February 15, 2023
Term ABS 2021-3
May 20, 2021
562.6
Through May 15, 2023
Term ABS 2021-4
October 28, 2021
312.6
Through October 16, 2023
Term ABS 2022-1
June 16, 2022
437.6
Through June 17, 2024
Term ABS 2022-2
December 15, 2022
250.1
Through December 15, 2025
Term ABS 2022-3
November 3, 2022
500.1
Through October 15, 2024
Term ABS 2023-1
March 16, 2023
500.2
Through March 17, 2025
Term ABS 2023-2
May 25, 2023
500.1
Through May 15, 2025
Senior Notes
On December 18, 2019, we issued $400.0 million aggregate principal amount of 5.125% senior notes due 2024 (the “2024 senior notes”). The 2024 senior notes were issued pursuant to an indenture, dated as of December 18, 2019, among the Company, as issuer, the Company’s subsidiaries Buyers Vehicle Protection Plan, Inc. and Vehicle Remarketing Services, Inc., as guarantors (collectively, the “Guarantors”), and U.S. Bank National Association, as trustee.
The 2024 senior notes mature on December 31, 2024 and bear interest at a rate of 5.125% per annum, computed on the basis of a 360-day year composed of twelve 30-day months and payable semi-annually on June 30 and December 31 of each year, beginning on June 30, 2020. We used a portion of the net proceeds from the 2024 senior notes to repurchase or redeem all of the $300.0 million outstanding principal amount of our 6.125% senior notes due 2021 (the “2021 senior notes”), of which $148.2 million was repurchased on December 18, 2019 and the remaining $151.8 million was redeemed on January 17, 2020. We used the remaining net proceeds from the 2024 senior notes, together with borrowings under our revolving credit facility and cash on hand to the extent available, to redeem in full the $250.0 million outstanding principal amount of our 7.375% senior notes due 2023 (the “2023 senior notes”) on March 15, 2020. During the fourth quarter of 2019, we recognized a pre-tax loss on extinguishment of debt of $1.8 million related to the repurchase of the 2021 senior notes in the fourth quarter of 2019 and the irrevocable notice given in December 2019 for the redemption of the remaining 2021 senior notes in the first quarter of 2020. During the first quarter of 2020, we recognized a pre-tax loss on extinguishment of debt of $7.4 million related to the redemption of the 2023 senior notes.
On March 7, 2019, we issued $400.0 million aggregate principal amount of 6.625% senior notes due 2026 (the “2026 senior notes”). The 2026 senior notes were issued pursuant to an indenture, dated as of March 7, 2019, among the Company, as issuer, the Guarantors and U.S. Bank National Association, as trustee.
The 2026 senior notes mature on March 15, 2026 and bear interest at a rate of 6.625% per annum, computed on the basis of a 360-day year composed of twelve 30-day months and payable semi-annually on March 15 and September 15 of each year, beginning on September 15, 2019. We used the net proceeds from the offering of the 2026 senior notes for general corporate purposes, including repayment of outstanding borrowings under our revolving secured line of credit facility.
The 2024 senior notes and 2026 senior notes (the “senior notes”) are guaranteed on a senior basis by the Guarantors, which are also guarantors of obligations under our revolving secured line of credit facility. Other existing and future subsidiaries of ours may become guarantors of the senior notes in the future. The indentures for the senior notes provide for a guarantor of the senior notes to be released from its obligations under its guarantee of the senior notes under specified circumstances.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)
Mortgage Note
We have a $9.0 million mortgage note with a commercial bank that is secured by a first mortgage lien on a building acquired by us and an assignment of all leases, rents, revenues, and profits under all present and future leases of the building. The note matures on August 6, 2028, and bears interest at BSBY plus 150 basis points.
Debt Covenants
As of June 30, 2023, we were in compliance with our covenants under our revolving secured line of credit facility and our Warehouse facilities, including those that require the maintenance of certain financial ratios and other financial conditions. These covenants require a minimum ratio of (1) our net earnings, adjusted for specified items, before income taxes, depreciation, amortization, and fixed charges to (2) our fixed charges, as defined in the agreements. These covenants also limit the maximum ratio of our funded debt less unrestricted cash and cash equivalents to tangible net worth. Some of these covenants may indirectly limit the repurchase of common stock or payment of dividends on common stock. Our Warehouse facilities also contain covenants that measure the performance of the conveyed assets.
Our Term ABS financings also contain covenants that measure the performance of the conveyed assets. As of June 30, 2023, we were in compliance with all such covenants. As of the end of the quarter, we were also in compliance with our covenants under the senior notes indentures and the RTP facility.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)
10. DERIVATIVE AND HEDGING INSTRUMENTS
Interest Rate Caps. We utilize interest rate cap agreements to manage the interest rate risk on certain secured financings. The following tables provide the terms of our interestrate cap agreements that were in effect as of June 30, 2023 and December 31, 2022:
(Dollars in millions)
As of June 30, 2023
Facility Amount
Facility Name
Purpose
Start
End
Notional
Cap Interest Rate (1)
$
400.0
Warehouse Facility II
Cap Floating Rate
07/2022
12/2023
$
205.0
6.50
%
300.0
Warehouse Facility IV
Cap Floating Rate
07/2019
07/2023
25.0
6.50
%
Cap Floating Rate
05/2023
11/2024
275.0
7.50
%
300.0
200.0
Warehouse Facility V
Cap Floating Rate
04/2023
01/2026
94.0
5.44
%
200.0
Warehouse Facility VIII
Cap Floating Rate
08/2019
08/2023
33.3
5.42
%
Cap Floating Rate
09/2022
09/2025
166.7
5.42
%
200.0
100.0
Term ABS 2021-1
Cap Floating Rate
04/2023
06/2024
75.0
5.46
%
200.0
Term ABS 2022-2
Cap Floating Rate
12/2022
06/2024
200.0
6.50
%
(Dollars in millions)
As of December 31, 2022
Facility Amount
Facility Name
Purpose
Start
End
Notional
Cap Interest Rate (1)
$
400.0
Warehouse Facility II
Cap Floating Rate
07/2022
12/2023
$
205.0
6.50
%
300.0
Warehouse Facility IV
Cap Floating Rate
07/2019
07/2023
175.0
6.50
%
200.0
Warehouse Facility V
Cap Floating Rate
12/2020
01/2026
94.0
5.50
%
200.0
Warehouse Facility VIII
Cap Floating Rate
08/2019
08/2023
116.7
5.50
%
Cap Floating Rate
09/2022
09/2025
83.3
5.50
%
200.0
100.0
Term ABS 2021-1
Cap Floating Rate
02/2021
06/2024
100.0
5.50
%
200.0
Term ABS 2022-2
Cap Floating Rate
12/2022
06/2024
200.0
6.50
%
(1)Rate excludes the spread over the corresponding benchmark rate.
The interest rate caps have not been designated as hedging instruments. As of June 30, 2023 and December 31, 2022, the interest rate caps had a fair value of $1.4 million and $2.0 million, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)
11. INCOME TAXES
A reconciliation of the U.S. federal statutory income tax rate to our effective income tax rate is as follows:
For the Three Months Ended June 30,
For the Six Months Ended June 30,
2023
2022
2023
2022
U.S. federal statutory income tax rate
21.0
%
21.0
%
21.0
%
21.0
%
State and local income taxes
-4.3
%
3.0
%
1.9
%
3.0
%
Excess tax benefits from stock-based compensation
0.1
%
-0.1
%
-3.5
%
-0.1
%
Other
3.6
%
0.5
%
1.9
%
0.7
%
Effective income tax rate
20.4
%
24.4
%
21.3
%
24.6
%
State and local income taxes
The decrease in our state income tax rate from 2022 to 2023 was primarily the result of the settlement of an uncertain tax position for state income taxes during the second quarter of 2023.
Excess tax benefits from stock-based compensation
We recognize an excess tax benefit or tax deficiency when the deduction for the stock-based compensation expense of a stock award for tax purposes differs from the cumulative stock-based compensation expense recognized in the financial statements. The excess tax benefit or tax deficiency is recognized in provision for income taxes in the period in which the amount of the deduction is determined, which is when restricted stock units are converted to common stock or stock options are exercised. Excess tax benefits reduce our effective income tax rate, while tax deficiencies increase our effective income tax rate. The impact of excess tax benefits on our effective income tax rate for the six months ended June 30, 2023 increased from the same period in 2022 primarily due to an increase in the number of restricted stock units that were converted to common stock during the first quarter of 2023 due to the timing of long-term stock award grants.
Other
Other items impacting our effective income tax rate primarily consist of non-deductible executive compensation expense. The impact of non-deductible expense on our effective income tax rate for the three and six months ended June 30, 2023 increased in magnitude from the same period in 2022 due to an increase in non-deductible executive compensation and a decrease in pre-tax income.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)
12. NET INCOME PER SHARE
Basic net income per share has been computed by dividing net income by the basic number of weighted average shares outstanding. Diluted net income per share has been computed by dividing net income by the diluted number of weighted average shares outstanding using the treasury stock method. The share effect is as follows:
For the Three Months Ended June 30,
For the Six Months Ended June 30,
2023
2022
2023
2022
Weighted average shares outstanding:
Common shares
12,832,945
13,069,364
12,821,478
13,483,613
Vested restricted stock units
216,990
366,143
232,277
366,098
Basic number of weighted average shares outstanding
13,049,935
13,435,507
13,053,755
13,849,711
Dilutive effect of restricted stock units and stock options
50,026
82,472
32,233
77,661
Dilutive number of weighted average shares outstanding
13,099,961
13,517,979
13,085,988
13,927,372
The following outstanding stock awards were excluded from the computation of diluted net income per share because their inclusion would have been anti-dilutive:
For the Three Months Ended June 30,
For the Six Months Ended June 30,
2023
2022
2023
2022
Stock options
228,625
67,264
241,201
56,492
Restricted stock units
6,031
—
5,814
—
Total
234,656
67,264
247,015
56,492
13. STOCK REPURCHASES
The following table summarizes our stock repurchases for the three and six months ended June 30, 2023 and 2022:
(Dollars in millions)
For the Three Months Ended June 30,
2023
2022
Stock Repurchases
Number of Shares Repurchased
Cost
Number of Shares Repurchased
Cost
Open Market (1)
15,802
$
7.6
403,953
$
229.7
Other (2)
424
0.2
—
—
Total
16,226
$
7.8
403,953
$
229.7
(Dollars in millions)
For the Six Months Ended June 30,
2023
2022
Stock Repurchases
Number of Shares Repurchased
Cost
Number of Shares Repurchased
Cost
Open Market (1)
15,802
$
7.6
1,205,943
$
651.7
Other (2)
33,459
15.1
1,745
1.0
Total
49,261
$
22.7
1,207,688
$
652.7
(1) Represents repurchases under authorizations by the board of directors for the repurchase of shares by us from time to time in the open market through privately negotiated transactions, through block trades, pursuant to trading plans adopted in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934 or otherwise. On September 28, 2021, the board of directors authorized the repurchase of up to two million shares of our common stock in addition to the board’s prior authorizations. As of June 30, 2023, we had authorization to repurchase 142,267 shares of our common stock.
(2) Represents shares of common stock released to us by team members as payment of tax withholdings upon the vesting of restricted stock units and the conversion of restricted stock units to common stock.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(UNAUDITED)
15. COMMITMENTS AND CONTINGENCIES
Litigation and Other Legal Matters
In the normal course of business and as a result of the consumer-oriented nature of the industry in which we operate, we and other industry participants are frequently subject to various consumer claims, litigation, and regulatory investigations seeking damages, fines, and statutory penalties. The claims allege, among other theories of liability, violations of state, federal and foreign truth-in-lending, credit availability, credit reporting, consumer protection, warranty, debt collection, insurance, and other consumer-oriented laws and regulations, including claims seeking damages for alleged physical and mental harm relating to the repossession and sale of consumers’ vehicles and other debt collection activities. As the assignee of Consumer Loans originated by Dealers, we may also be named as a co-defendant in lawsuits filed by consumers principally against Dealers. We may also have disputes and litigation with Dealers. The claims may allege, among other theories of liability, that we breached our Dealer servicing agreement. We may also have disputes and litigation with vendors and other third parties. The claims may allege, among other theories of liability, that we breached a license agreement or contract. The damages, fines, and penalties that may be claimed by consumers, regulatory agencies, Dealers, vendors, or other third parties in these types of matters can be substantial. The relief requested by plaintiffs varies but may include requests for compensatory, statutory, and punitive damages and injunctive relief, and plaintiffs may seek treatment as purported class actions. The following matters include current actions to which we are a party and updates to matters that were disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.
On December 1, 2021, we received a subpoena from the Office of the Attorney General for the State of California seeking documents and information regarding GAP products, GAP product administration, and refunds. We are cooperating with this inquiry and cannot predict the eventual scope, duration, or outcome at this time. As a result, we are unable to estimate the reasonably possible loss or range of reasonably possible loss arising from this investigation.
On May 7, 2019, we received a subpoena from the Consumer Frauds and Protection Bureau of the Office of the New York State Attorney General, relating to the Company’s origination and collection policies and procedures in the state of New York. After May 7, 2019 through April 30, 2021, we received additional subpoenas from the Office of the New York State Attorney General relating to the Company’s origination, collection, and securitization practices. On November 19, 2020 and August 23, 2022, we received letters from the Office of the New York State Attorney General indicating that it may commence litigation against the Company asserting violations of New York Executive Law § 63(12) and New York General Business Law §§ 349 and 352 et seq. and applicable federal laws, including but not limited to claims that the Company engaged in unfair and deceptive trade practices in auto lending, debt collection, and asset-backed securitizations in the State of New York in violation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, New York Executive Law § 63(12), the New York Martin Act, and New York General Business Law § 349. See the description below of the lawsuit commenced by the Office of the New York State Attorney General on January 4, 2023.
On April 22, 2019, we received a civil investigative demand from the Consumer Financial Protection Bureau (“Bureau”) seeking, among other things, certain information relating to the Company’s origination and collection of Consumer Loans, TPPs, and credit reporting. After April 22, 2019 through March 7, 2022, we received additional subpoenas from the Bureau. On December 6, 2021, we received a Notice and Opportunity to Respond and Advise letter from the Staff of the Office of Enforcement (“Staff”) of the Bureau, stating that the Staff was considering whether to recommend that the Bureau take legal action against the Company for alleged violations of the Consumer Financial Protection Act of 2010 (the “CFPA”) in connection with the Company’s consumer loan origination practices. See the description below of the lawsuit commenced by the Bureau on January 4, 2023.
On January 4, 2023, the Office of the New York State Attorney General and the Bureau jointly filed a complaint in the United States District Court for the Southern District of New York alleging that the Company engaged in deceptive practices, fraud, illegality, and securities fraud in violation of New York Executive Law § 63(12) and New York General Business Law §§ 349 and 352, and that the Company engaged in deceptive and abusive acts and provided substantial assistance to a covered person or service provider in violation of the CFPA, 12 U.S.C. § 5531 and 12 U.S.C. § 5536(a)(1)(B). The complaint seeks injunctive relief, an accounting of all consumers for whom the Company provided financing, restitution, damages, disgorgement, civil penalties, and payment of costs. On March 14, 2023, the Company filed a motion to dismiss the complaint. We cannot predict the eventual scope, duration, or outcome of this lawsuit at this time. As a result, we are unable to estimate the reasonably possible loss or range of reasonably possible loss arising from this litigation. The Company intends to vigorously defend itself in this matter.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONCLUDED)
(UNAUDITED)
On March 18, 2016, we received a subpoena from the Attorney General of the State of Maryland, relating to the Company’s repossession and sale policies and procedures in the state of Maryland. On April 3, 2020, we received a subpoena from the Attorney General of the State of Maryland relating to the Company’s origination and collection policies and procedures in the state of Maryland. On August 11, 2020, we received a subpoena from the Attorney General of the State of Maryland restating most of the requests contained in the March 18, 2016 and April 3, 2020 subpoenas, making additional requests, and expanding the inquiry to include 41 other states (Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Michigan, Minnesota, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, and Wisconsin) and the District of Columbia. Also on August 11, 2020, we received from the Attorney General of the State of New Jersey a subpoena that is essentially identical to the August 11, 2020 Maryland subpoena, both as to substance and as to the jurisdictions identified. The Company has been informed that the State of Kansas, the State of Texas, and the State of Iowa have withdrawn from the multistate investigation. We are cooperating with these investigations and cannot predict their eventual scope, duration, or outcome at this time. As a result, we are unable to estimate the reasonably possible loss or range of reasonably possible loss arising from these investigations.
On December 9, 2014, we received a civil investigative subpoena from the U.S. Department of Justice pursuant to the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 directing us to produce certain information relating to subprime automotive finance and related securitization activities. We have cooperated with the inquiry, but cannot predict the eventual scope, duration, or outcome at this time. As a result, we are unable to estimate the reasonably possible loss or range of reasonably possible loss arising from this investigation.
An adverse ultimate disposition in any action to which we are a party or otherwise subject could have a material adverse impact on our financial position, liquidity, and results of operations.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included in Item 8 - Financial Statements and Supplementary Data, of our 2022 Annual Report on Form 10-K, as well as Part I - Item 1 - Financial Statements, of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
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 three months ended June 30, 2023, consolidated net income was $22.2 million, or $1.69 per diluted share, compared to consolidated net income of $107.4 million, or $7.94 per diluted share, for the same period in 2022, primarily due to increases in provision for credit losses on forecast changes and interest expense. Our results for the three months ended June 30, 2023 included:
•A decrease in forecasted collection rates during the second quarter of 2023, which decreased forecasted net cash flows from our Loan portfolio by $89.3 million, or 0.9%, compared to a decrease in forecasted collection rates during the second quarter of 2022, which decreased forecasted net cash flows from our Loan portfolio by $43.4 million, or 0.5%. The $89.3 million decrease in forecasted net cash flows for the second quarter of 2023 included the impact of an adjustment to our forecasting methodology, which upon implementation, decreased our estimate of future net cash flows by $44.5 million, or 0.5%. In addition, forecasted net cash flow timing slowed during the second quarter of 2023, primarily as a result of a decrease in Consumer Loan prepayments to below-average levels. Changes in the amount and timing of forecasted net cash flows are recognized in the period of change through provision for credit losses.
•Forecasted profitability per Consumer Loan assignment for Consumer Loans assigned in 2020 through 2022 that was lower than our estimates at June 30, 2022, due to a decline in forecasted collection rates since the second quarter of 2022 and slower forecasted net cash flow timing during 2023, primarily as a result of a decrease in Consumer Loan prepayments to below-average levels.
•Growth in Consumer Loan assignment volume, as unit and dollar volumes grew 12.8% and 8.3%, respectively, as compared to the second quarter of 2022. The average balance of our Loan portfolio for the second quarter of 2023 increased 4.3% as compared to the second quarter of 2022.
•Initial spread on Consumer Loans assigned in the second quarter of 2023 increased to 21.2% compared to 20.0% on Consumer Loans assigned in the second quarter of 2022.
For the six months ended June 30, 2023, consolidated net income was $121.7 million, or $9.30 per diluted share, compared to consolidated net income of $321.7 million, or $23.10 per diluted share, for the same period in 2022, primarily due to increases in provision for credit losses on forecast changes and interest expense. Our results for the six months ended June 30, 2023 included:
•A decrease in forecasted collection rates during the first six months of 2023, which decreased forecasted net cash flows from our Loan portfolio by $79.9 million, or 0.9%, compared to an increase in forecasted collection rates during the first six months of 2022, which increased forecasted net cash flows from our Loan portfolio by $66.8 million, or 0.7%. The $79.9 million decrease in forecasted net cash flows for the first six months of 2023 included the impact of an adjustment to our forecasting methodology, which upon implementation, decreased our estimate of future net cash flows by $44.5 million, or 0.5%. In addition, forecasted net cash flow timing slowed during the first six months of 2023, primarily as a result of a decrease in Consumer Loan prepayments to below-average levels. Changes in the amount and timing of forecasted net cash flows are recognized in the period of change through provision for credit losses.
•Growth in Consumer Loan assignment volume, as unit and dollar volumes grew 17.8% and 13.3%, respectively, as compared to the first six months of 2022. The average balance of our Loan portfolio for the first six months of 2023 increased 2.5% as compared to the first six months of 2022.
•Initial spread on Consumer Loans assigned in the first six months of 2023 increased to 21.1% compared to 19.7% on Consumer Loans assigned in the first six months of 2022.
Critical success factors include our ability to accurately forecast Consumer Loan performance, access capital on acceptable terms, and maintain or grow Consumer Loan volume at the level and on the terms that we anticipate, with the objective to maximize economic profit over the long term. Economic profit is a non-GAAP financial measure we use to evaluate our financial results and determine profit-sharing for team members. We also use economic profit as a framework to evaluate business decisions and strategies. 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 Metrics
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 of June 30, 2023, with the forecasts as of March 31, 2023, as of December 31, 2022, and at the time of assignment, segmented by year of assignment:
Forecasted Collection Percentage as of (1)
Current Forecast Variance from
Consumer Loan Assignment Year
June 30, 2023
March 31, 2023
December 31, 2022
Initial Forecast
March 31, 2023
December 31, 2022
Initial Forecast
2014
71.7
%
71.7
%
71.7
%
71.8
%
0.0
%
0.0
%
-0.1
%
2015
65.2
%
65.2
%
65.2
%
67.7
%
0.0
%
0.0
%
-2.5
%
2016
63.8
%
63.8
%
63.8
%
65.4
%
0.0
%
0.0
%
-1.6
%
2017
64.7
%
64.7
%
64.7
%
64.0
%
0.0
%
0.0
%
0.7
%
2018
65.4
%
65.3
%
65.2
%
63.6
%
0.1
%
0.2
%
1.8
%
2019
66.8
%
66.8
%
66.6
%
64.0
%
0.0
%
0.2
%
2.8
%
2020
67.8
%
67.9
%
67.8
%
63.4
%
-0.1
%
0.0
%
4.4
%
2021
65.5
%
66.0
%
66.2
%
66.3
%
-0.5
%
-0.7
%
-0.8
%
2022
64.3
%
66.0
%
66.3
%
67.5
%
-1.7
%
-2.0
%
-3.2
%
2023 (2)
67.5
%
67.2
%
—
67.5
%
0.3
%
—
0.0
%
(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.
(2)The forecasted collection rate for 2023 Consumer Loans as of June 30, 2023 includes both Consumer Loans that were in our portfolio as of March 31, 2023 and Consumer Loans assigned during the most recent quarter. The following table provides forecasted collection rates for each of these segments.
Forecasted Collection Percentage as of
Current Forecast Variance from
2023 Consumer Loan Assignment Period
June 30, 2023
March 31, 2023
Initial Forecast
March 31, 2023
Initial Forecast
January 1, 2023 through March 31, 2023
67.4
%
67.2
%
67.1
%
0.2
%
0.3
%
April 1, 2023 through June 30, 2023
67.7
%
—
67.9
%
—
-0.2
%
Consumer Loans assigned in 2018 through 2020 have yielded forecasted collection results significantly better than our initial estimates, while Consumer Loans assigned in 2015, 2016, and 2022 have yielded forecasted collection results significantly worse than our initial estimates. For all other assignment years presented, actual results have been close to our initial estimates. For the three months ended June 30, 2023, forecasted collection rates declined for Consumer Loans assigned in 2021 and 2022 and were generally consistent with expectations at the start of the period for all other assignment years presented. For the six months ended June 30, 2023, forecasted collection rates improved for Consumer Loans assigned in 2018 and 2019, declined for Consumer Loans assigned in 2021 and 2022, and were generally consistent with expectations at the start of the period for all other assignment years presented.
The changes in forecasted collection rates for the three and six months ended June 30, 2023 and 2022 impacted forecasted net cash flows (forecasted collections less forecasted Dealer Holdback payments) as follows:
(In millions)
For the Three Months Ended June 30,
For the Six Months Ended June 30,
Increase (Decrease) in Forecasted Net Cash Flows
2023
2022
2023
2022
Dealer Loans
$
(41.8)
$
(14.0)
$
(49.0)
$
19.9
Purchased Loans
(47.5)
(29.4)
(30.9)
46.9
Total
$
(89.3)
$
(43.4)
$
(79.9)
$
66.8
During the second quarter of 2023, we adjusted our methodology for forecasting the amount and timing of future net cash flows from our Loan portfolio through the utilization of more recent Consumer Loan performance and Consumer Loan prepayment data. During the first half of 2023, we experienced a decrease in Consumer Loan prepayments to below-average levels and as a result, slowed our forecasted net cash flow timing. Historically, Consumer Loan prepayments have been lower in periods with less availability of consumer credit. Changes in the amount and timing of forecasted net cash flows are recognized in the period of change as a provision for credit losses. The implementation of the adjustment to our forecasting methodology during the second quarter of 2023 reduced forecasted net cash flows by $44.5 million, or 0.5%, and increased provision for credit losses by $71.3 million.
The following table presents information on the average Consumer Loan assignment for each of the last 10 years:
Average
Consumer Loan Assignment Year
Consumer Loan (1)
Advance (2)
Initial Loan Term (in months)
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
2022
27,242
12,924
60
2023 (3)
26,912
12,488
61
(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.
(3)The averages for 2023 Consumer Loans include both Consumer Loans that were in our portfolio as of March 31, 2023 and Consumer Loans assigned during the most recent quarter. The following table provides averages for each of these segments:
The profitability of our loans is primarily driven by the amount and timing of the net cash flows we receive from the spread between the forecasted collection rate and the advance rate, less operating expenses and the cost of capital. Forecasting collection rates accurately at Loan inception is difficult. With this in mind, we establish advance rates that are intended to allow us to achieve acceptable levels of profitability, even if collection rates are less than we initially forecast.
The following table presents forecasted Consumer Loan collection rates, advance rates, the spread (the forecasted collection rate less the advance rate), and the percentage of the forecasted collections that had been realized as of June 30, 2023, as well as the forecasted collection rates and spread at the time of assignment. All amounts, unless otherwise noted, are presented as a percentage of the initial balance of the Consumer Loan (principal + interest). The table includes both Dealer Loans and Purchased Loans.
Forecasted Collection % as of
Spread % as of
Consumer Loan Assignment Year
June 30, 2023
Initial Forecast
Advance % (1)
June 30, 2023
Initial Forecast
% of Forecast Realized (2)
2014
71.7
%
71.8
%
47.7
%
24.0
%
24.1
%
99.7
%
2015
65.2
%
67.7
%
44.5
%
20.7
%
23.2
%
99.3
%
2016
63.8
%
65.4
%
43.8
%
20.0
%
21.6
%
98.9
%
2017
64.7
%
64.0
%
43.2
%
21.5
%
20.8
%
98.2
%
2018
65.4
%
63.6
%
43.5
%
21.9
%
20.1
%
95.2
%
2019
66.8
%
64.0
%
44.0
%
22.8
%
20.0
%
88.8
%
2020
67.8
%
63.4
%
43.9
%
23.9
%
19.5
%
77.5
%
2021
65.5
%
66.3
%
46.0
%
19.5
%
20.3
%
59.5
%
2022
64.3
%
67.5
%
47.4
%
16.9
%
20.1
%
30.3
%
2023 (3)
67.5
%
67.5
%
46.4
%
21.1
%
21.1
%
6.7
%
(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.
(3)The forecasted collection rate, advance rate and spread for 2023 Consumer Loans as of June 30, 2023 include both Consumer Loans that were in our portfolio as of March 31, 2023 and Consumer Loans assigned during the most recent quarter. The following table provides forecasted collection rates, advance rates, and spreads for each of these segments:
Forecasted Collection % as of
Spread % as of
2023 Consumer Loan Assignment Period
June 30, 2023
Initial Forecast
Advance %
June 30, 2023
Initial Forecast
January 1, 2023 through March 31, 2023
67.4
%
67.1
%
46.1
%
21.3
%
21.0
%
April 1, 2023 through June 30, 2023
67.7
%
67.9
%
46.7
%
21.0
%
21.2
%
The risk of a material change in our forecasted collection rate declines as the Consumer Loans age. For 2018 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 as of June 30, 2023 and the advance rate ranges from 16.9% to 24.0%, on an annual basis, for Consumer Loans assigned over the last 10 years. The spreads with respect to 2019 and 2020 Consumer Loans have been positively impacted by Consumer Loan performance, which has exceeded our initial estimates by a greater margin than the other years presented. The spread with respect to 2022 Consumer Loans has been negatively impacted by Consumer Loan performance, which has been lower than our initial estimates by a greater margin than the other years presented. The higher spread for 2023 Consumer Loans relative to 2022 Consumer Loans as of June 30, 2023 is primarily due to the performance of the 2022 Consumer Loans. Additionally, 2023 Consumer Loans had a higher initial spread due to a decrease in the advance rate.
The following table compares our forecast of Consumer Loan collection rates as of June 30, 2023 with the forecasts at the time of assignment, for Dealer Loans and Purchased Loans separately:
Dealer Loans
Purchased Loans
Forecasted Collection Percentage as of (1)
Forecasted Collection Percentage as of (1)
Consumer Loan Assignment Year
June 30, 2023
Initial Forecast
Variance
June 30, 2023
Initial Forecast
Variance
2014
71.6
%
71.9
%
-0.3
%
72.5
%
70.9
%
1.6
%
2015
64.6
%
67.5
%
-2.9
%
68.9
%
68.5
%
0.4
%
2016
63.0
%
65.1
%
-2.1
%
66.0
%
66.5
%
-0.5
%
2017
64.0
%
63.8
%
0.2
%
66.3
%
64.6
%
1.7
%
2018
64.8
%
63.6
%
1.2
%
66.7
%
63.5
%
3.2
%
2019
66.5
%
63.9
%
2.6
%
67.5
%
64.2
%
3.3
%
2020
67.6
%
63.3
%
4.3
%
68.0
%
63.6
%
4.4
%
2021
65.2
%
66.3
%
-1.1
%
66.0
%
66.3
%
-0.3
%
2022
63.7
%
67.3
%
-3.6
%
65.7
%
68.0
%
-2.3
%
2023
66.8
%
67.0
%
-0.2
%
69.2
%
68.8
%
0.4
%
(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 June 30, 2023 for Dealer Loans and Purchased Loans separately. All amounts are presented as a percentage of the initial balance of the Consumer Loan (principal + interest).
Dealer Loans
Purchased Loans
Consumer Loan Assignment Year
Forecasted Collection % (1)
Advance % (1)(2)
Spread %
Forecasted Collection % (1)
Advance % (1)(2)
Spread %
2014
71.6
%
47.2
%
24.4
%
72.5
%
51.8
%
20.7
%
2015
64.6
%
43.4
%
21.2
%
68.9
%
50.2
%
18.7
%
2016
63.0
%
42.1
%
20.9
%
66.0
%
48.6
%
17.4
%
2017
64.0
%
42.1
%
21.9
%
66.3
%
45.8
%
20.5
%
2018
64.8
%
42.7
%
22.1
%
66.7
%
45.2
%
21.5
%
2019
66.5
%
43.1
%
23.4
%
67.5
%
45.6
%
21.9
%
2020
67.6
%
43.0
%
24.6
%
68.0
%
45.5
%
22.5
%
2021
65.2
%
45.1
%
20.1
%
66.0
%
47.7
%
18.3
%
2022
63.7
%
46.4
%
17.3
%
65.7
%
50.1
%
15.6
%
2023
66.8
%
45.0
%
21.8
%
69.2
%
49.7
%
19.5
%
(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 as compared to the advance rate on Dealer Loans, Purchased Loans do not require us to pay Dealer Holdback.
The spread as of June 30, 2023 on 2023 Dealer Loans was 21.8%, as compared to a spread of 17.3% on 2022 Dealer Loans. The increase was primarily as a result of Consumer Loan performance, as the performance of 2022 Dealer Loans has been significantly lower than our initial estimates. Additionally, 2023 Dealer Loans had a higher initial spread, due to the advance rate decreasing by a greater margin than the initial forecast.
The spread as of June 30, 2023 on 2023 Purchased Loans was 19.5%, as compared to a spread of 15.6% on 2022 Purchased Loans. The increase was primarily as a result of Consumer Loan performance, as the performance of 2022 Purchased Loans has been significantly lower than our initial estimates, while the performance of 2023 Purchased Loans has exceeded our initial estimates. Additionally, 2023 Purchased Loans had a higher initial spread, due to a higher initial forecast and a lower advance rate.
Access to Capital
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 2.7 to 1 as of June 30, 2023. We currently utilize the following primary forms of debt financing: (1) our revolving secured line of credit facility; (2) Warehouse facilities; (3) Term ABS financings; and (4) senior notes.
Consumer Loan Volume
The following table summarizes changes in Consumer Loan assignment volume in each of the last six quarters as compared to the same period in the previous year:
Year over Year Percent Change
Three Months Ended
Unit Volume
Dollar Volume (1)
March 31, 2022
-22.1
%
-10.5
%
June 30, 2022
5.1
%
22.0
%
September 30, 2022
29.3
%
32.1
%
December 31, 2022
25.6
%
26.2
%
March 31, 2023
22.8
%
18.6
%
June 30, 2023
12.8
%
8.3
%
(1)Represents advances paid to Dealers on Consumer Loans assigned under our Portfolio Program and one-time payments made to Dealers to purchase Consumer Loans assigned under our Purchase Program. Payments of Dealer Holdback and accelerated Dealer Holdback 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.
Unit and dollar volumes grew 12.8% and 8.3%, respectively, during the second quarter of 2023 as the number of active Dealers grew 16.1% and the average unit volume per active Dealer decreased 2.3%. Dollar volume increased less than unit volume during the second quarter of 2023 due to a decrease in the average advance paid, primarily due to a decrease in the average advance rate. Unit volume for July 2023 grew 11.8% compared to unit volume for July 2022.
The following table summarizes the changes in Consumer Loan unit volume and active Dealers:
For the Three Months Ended June 30,
For the Six Months Ended June 30,
2023
2022
% Change
2023
2022
% Change
Consumer Loan unit volume
82,727
73,340
12.8
%
172,548
146,456
17.8
%
Active Dealers (1)
9,860
8,494
16.1
%
11,618
9,815
18.4
%
Average volume per active Dealer
8.4
8.6
-2.3
%
14.9
14.9
0.0
%
Consumer Loan unit volume from Dealers active both periods
62,433
61,569
1.4
%
138,388
130,466
6.1
%
Dealers active both periods
6,053
6,053
—
7,541
7,541
—
Average volume per Dealer active both periods
10.3
10.2
1.4
%
18.4
17.3
6.1
%
Consumer Loan unit volume from Dealers not active both periods
20,294
11,771
72.4
%
34,160
15,990
113.6
%
Dealers not active both periods
3,807
2,441
56.0
%
4,077
2,274
79.3
%
Average volume per Dealer not active both periods
5.3
4.8
10.4
%
8.4
7.0
20.0
%
(1)Active Dealers are Dealers who have received funding for at least one Consumer Loan during the period.
The following table provides additional information on the changes in Consumer Loan unit volume and active Dealers:
For the Three Months Ended June 30,
For the Six Months Ended June 30,
2023
2022
% Change
2023
2022
% Change
Consumer Loan unit volume from new active Dealers
3,377
2,328
45.1
%
14,812
8,517
73.9
%
New active Dealers (1)
954
682
39.9
%
2,112
1,370
54.2
%
Average volume per new active Dealer
3.5
3.4
2.9
%
7.0
6.2
12.9
%
Attrition (2)
-16.0
%
-13.2
%
-10.9
%
-10.1
%
(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.
The following table shows the percentage of Consumer Loans assigned to us as Dealer Loans and Purchased Loans for each of the last six quarters:
Unit Volume
Dollar Volume (1)
Three Months Ended
Dealer Loans
Purchased Loans
Dealer Loans
Purchased Loans
March 31, 2022
72.7
%
27.3
%
68.6
%
31.4
%
June 30, 2022
74.0
%
26.0
%
70.4
%
29.6
%
September 30, 2022
74.3
%
25.7
%
70.5
%
29.5
%
December 31, 2022
73.1
%
26.9
%
69.6
%
30.4
%
March 31, 2023
72.1
%
27.9
%
68.1
%
31.9
%
June 30, 2023
72.4
%
27.6
%
68.6
%
31.4
%
(1)Represents advances paid to Dealers on Consumer Loans assigned under our Portfolio Program and one-time payments made to Dealers to purchase Consumer Loans assigned under our Purchase Program. Payments of Dealer Holdback and accelerated Dealer Holdback are not included.
As of June 30, 2023 and December 31, 2022, the net Dealer Loans receivable balance was 65.7% and 64.7%, respectively, of the total net Loans receivable balance.
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 GAAP methodology we employ (known as CECL) provides sufficient transparency into the economics of our business due to its asymmetry requiring us to recognize a significant provision for credit losses expense at the time of assignment for contractual net cash flows we never expect to realize and to recognize in subsequent periods finance charge revenue that is significantly in excess of our expected yields. For additional information, see Note 3 and Note 6 to the consolidated financial statements contained in Part I - Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022
The following is a discussion of our results of operations and income statement data on a consolidated basis.
(Dollars in millions, except per share data)
For the Three Months Ended June 30,
2023
2022
$ Change
% Change
Revenue:
Finance charges
$
441.0
$
425.6
$
15.4
3.6
%
Premiums earned
19.8
15.4
4.4
28.6
%
Other income
17.1
16.4
0.7
4.3
%
Total revenue
477.9
457.4
20.5
4.5
%
Costs and expenses:
Salaries and wages
70.2
65.4
4.8
7.3
%
General and administrative
20.5
32.3
(11.8)
-36.5
%
Sales and marketing
26.3
19.0
7.3
38.4
%
Total operating expenses
117.0
116.7
0.3
0.3
%
Provision for credit losses on forecast changes
168.8
50.0
118.8
237.6
%
Provision for credit losses on new Consumer Loan assignments
Finance Charges. The increase of $15.4 million, or 3.6%, was the result of an increase in the average net Loans receivable balance, partially offset by a decrease in the average yield on our Loan portfolio, as follows:
(Dollars in millions)
For the Three Months Ended June 30,
2023
2022
Change
Average net Loans receivable balance
$
6,596.6
$
6,328.7
$
267.9
Average yield on our Loan portfolio
26.7
%
26.9
%
-0.2
%
The following table summarizes the impact each component had on the overall increase in finance charges for the three months ended June 30, 2023:
(In millions)
Year over Year Change
Impact on finance charges:
For the Three Months Ended June 30, 2023
Due to an increase in the average net Loans receivable balance
$
18.0
Due to a decrease in the average yield
(2.6)
Total increase in finance charges
$
15.4
The increase in the average net Loans receivable balance was primarily due to the dollar volume of new Consumer Loan assignments exceeding the principal collected on Loans receivable. The decrease in the average yield of our Loan portfolio was primarily due to lower contractual yields on more recent Consumer Loan assignments.
Premiums Earned. The increase of $4.4 million, or 28.6%, was primarily due to growth in the size of our reinsurance portfolio, which resulted from growth in new Consumer Loan assignments and an increase in the average premiums written in recent periods.
Operating Expenses. The increase of $0.3 million, or 0.3%, was primarily due to:
•An increase in sales and marketing expense of $7.3 million, or 38.4%, primarily due to investments in our business to enhance our sales and marketing strategy, an increase in the size of our sales force, and an increase in sales commissions related to growth in Consumer Loan assignment volume.
•An increase in salaries and wages expense of $4.8 million, or 7.3%, primarily due to an increase in the number of team members in our engineering department as we are investing in our business to enhance our product and transform our technology systems to be more Dealer- and customer-focused and an increase in fringe benefits primarily due to higher medical claims.
•A decrease in general and administrative expense of $11.8 million, or 36.5%, primarily due to a decrease in legal expenses. Legal expenses for the three months ended June 30, 2022 included a $12.0 million settlement to settle and fully resolve a previously disclosed putative class action lawsuit.
Provision for Credit Losses. The increase of $103.0 million, or 69.8%, was primarily due to an increase in provision for credit losses on forecast changes, partially offset by a decrease in provision for credit losses on new Consumer Loan assignments.
We recognize provision for credit losses on new Consumer Loan assignments for contractual net cash flows that are not expected to be realized at the time of assignment. 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:
The increase in provision for credit losses related to forecast changes was primarily due to a decline in Consumer Loan performance during the second quarter of 2023 compared to the second quarter of 2022. During the second quarter of 2023, we decreased our estimate of future net cash flows by $89.3 million, or 0.9%, to reflect a decline in forecasted collection rates during the period and slowed our forecasted net cash flow timing to reflect a decrease in Consumer Loan prepayments to below-average levels. Historically, Consumer Loan prepayments have been lower in periods with less availability of consumer credit. The $89.3 million decrease in forecasted net cash flows for the second quarter of 2023 included the impact of an adjustment to our forecasting methodology, which upon implementation, decreased our estimate of future net cash flows by $44.5 million, or 0.5%, and increased our provision for credit losses by $71.3 million. We adjusted our methodology for forecasting the amount and timing of future net cash flows from our Loan portfolio through the utilization of more recent Consumer Loan performance and Consumer Loan prepayment data. During the second quarter of 2022, we reduced our estimate of future net cash flows by $43.4 million, or 0.5%, to reflect a decline in Consumer Loan performance during the period.
The decrease in provision for credit losses related to new Consumer Loan assignments was primarily due to a 25.7% decrease in the average provision per Consumer Loan assignment, partially offset by a 12.8% increase in Consumer Loan assignment unit volume. The decrease in the average provision per Consumer Loan assignment was primarily due to a decrease in the average advance rate for 2023 Consumer Loans.
Interest. The increase in interest expense of $23.9 million, or 61.4%, was primarily due to an increase in our average cost of debt, which was primarily the result of higher interest rates on recently-completed secured financings, as follows:
(Dollars in millions)
For the Three Months Ended June 30,
2023
2022
Change
Interest expense
$
62.8
$
38.9
$
23.9
Average outstanding debt principal balance (1)
4,754.3
4,795.4
(41.1)
Average cost of debt
5.3
%
3.2
%
2.1
%
(1) Includes the unamortized debt discount and excludes deferred debt issuance costs.
Provision for Claims. The increase in provision for claims of $7.5 million, or 61.5%, was primarily due to an increase in claims paid per reinsured vehicle service contract and an increase in the size of our reinsurance portfolio.
Provision for Income Taxes. For the three months ended June 30, 2023, the effective income tax rate decreased to 20.4% from 24.4% for the same period in 2022. The decrease was primarily due to the settlement of an uncertain tax position for state income taxes during the second quarter of 2023, partially offset by an increase in non-deductible executive compensation expense. For additional information, see Note 11 to the consolidated financial statements contained in Part I - Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022
The following is a discussion of our results of operations and income statement data on a consolidated basis.
(Dollars in millions, except per share data)
For the Six Months Ended June 30,
2023
2022
$ Change
% Change
Revenue:
Finance charges
$
862.1
$
849.7
$
12.4
1.5
%
Premiums earned
37.2
29.2
8.0
27.4
%
Other income
32.4
34.2
(1.8)
-5.3
%
Total revenue
931.7
913.1
18.6
2.0
%
Costs and expenses:
Salaries and wages
147.4
129.8
17.6
13.6
%
General and administrative
38.5
51.2
(12.7)
-24.8
%
Sales and marketing
48.4
38.2
10.2
26.7
%
Total operating expenses
234.3
219.2
15.1
6.9
%
Provision for credit losses on forecast changes
213.1
(29.3)
242.4
-827.3
%
Provision for credit losses on new Consumer Loan assignments
174.8
200.1
(25.3)
-12.6
%
Total provision for credit losses
387.9
170.8
217.1
127.1
%
Interest
117.2
75.4
41.8
55.4
%
Provision for claims
37.6
21.1
16.5
78.2
%
Total costs and expenses
777.0
486.5
290.5
59.7
%
Income before provision for income taxes
154.7
426.6
(271.9)
-63.7
%
Provision for income taxes
33.0
104.9
(71.9)
-68.5
%
Net income
$
121.7
$
321.7
$
(200.0)
-62.2
%
Net income per share:
Basic
$
9.32
$
23.23
$
(13.91)
-59.9
%
Diluted
$
9.30
$
23.10
$
(13.80)
-59.7
%
Weighted average shares outstanding:
Basic
13,053,755
13,849,711
(795,956)
-5.7
%
Diluted
13,085,988
13,927,372
(841,384)
-6.0
%
Finance Charges. The increase of $12.4 million, or 1.5%, was the result of an increase in the average net Loans receivable balance, partially offset by an decrease in the average yield on our Loan portfolio, as follows:
(Dollars in millions)
For the Six Months Ended June 30,
2023
2022
Change
Average net Loans receivable balance
$
6,476.3
$
6,317.7
$
158.6
Average yield on our Loan portfolio
26.6
%
26.9
%
-0.3
%
The following table summarizes the impact each component had on the overall increase in finance charges for the six months ended June 30, 2023:
(In millions)
Year over Year Change
Impact on finance charges:
For the Six Months Ended June 30, 2023
Due to an increase in the average net Loans receivable balance
The increase in the average net Loans receivable balance was primarily due to the dollar volume of new Consumer Loan assignments exceeding the principal collected on Loans receivable. The decrease in the average yield of our Loan portfolio was primarily due to lower contractual yields on more recent Consumer Loan assignments.
Premiums Earned. The increase of $8.0 million, or 27.4%, was primarily due to growth in the size of our reinsurance portfolio, which resulted from growth in new Consumer Loan assignments and an increase in the average premiums written in recent periods.
Operating Expenses. The increase of $15.1 million, or 6.9%, was primarily due to:
•An increase in salaries and wages expense of $17.6 million, or 13.6%, primarily due to an increase in the number of team members in our engineering department as we are investing in our business to enhance our product and transform our technology systems to be more Dealer- and customer-focused and an increase in fringe benefits primarily due to higher medical claims. The impact of the increases in the number of team members and in fringe benefits was partially offset by a decrease in cash-based incentive compensation expense due to a decline in Company performance measures.
•An increase in sales and marketing expense of $10.2 million, or 26.7%, primarily due to investments in our business to enhance our sales and marketing strategy, an increase in the size of our sales force, and an increase in sales commissions related to growth in Consumer Loan assignment volume.
•A decrease in general and administrative expense of $12.7 million, or 24.8%, primarily due to a decrease in legal expenses. Legal expenses for the six months ended June 30, 2022 included a $12.0 million settlement to settle and fully resolve a previously disclosed putative class action lawsuit.
Provision for Credit Losses. The increase of $217.1 million, or 127.1%, was due to an increase in provision for credit losses on forecast changes, partially offset by a decrease in provision for credit losses on new Consumer Loan assignments.
We recognize provision for credit losses on new Consumer Loan assignments for contractual net cash flows that are not expected to be realized at the time of assignment. We also recognize provision for credit losses on forecast changes in the amount and timing of expected future net cash flows subsequent to assignment. The following table summarizes the provision for credit losses for each of these components:
(In millions)
For the Six Months Ended June 30,
Provision for Credit Losses
2023
2022
Change
Forecast changes
$
213.1
$
(29.3)
$
242.4
New Consumer Loan assignments
174.8
200.1
(25.3)
Total
$
387.9
$
170.8
$
217.1
The increase in provision for credit losses related to forecast changes was primarily due to a decline in Consumer Loan performance during the first six months of 2023 compared to an improvement in Consumer Loan performance during the first six months of 2022. During the first six months of 2023, we decreased our estimate of future net cash flows by $79.9 million, or 0.9%, to reflect a decline in forecasted collection rates during the period and slowed our forecasted net cash flow timing to reflect a decrease in Consumer Loan prepayments to below-average levels. Historically, Consumer Loan prepayments have been lower in periods with less availability of consumer credit. The $79.9 million decrease in forecasted net cash flows for the first six months of 2023 included the impact of an adjustment to our forecasting methodology, which upon implementation, decreased our estimate of future net cash flows by $44.5 million, or 0.5%, and increased our provision for credit losses by $71.3 million. We adjusted our methodology for forecasting the amount and timing of future net cash flows from our Loan portfolio through the utilization of more recent Consumer Loan performance and Consumer Loan prepayment data. During the first six months of 2022, we increased our estimate of future net cash flows by $66.8 million, or 0.7%, to reflect an improvement in Consumer Loan performance during the period. The results for the first quarter of 2022 included the impact of forecasting methodology changes, which upon implementation, increased our estimate of future net cash flows by $95.7 million and reduced our provision for credit losses by $70.6 million. The forecasting methodology changes included the removal of the COVID forecast adjustment from our estimate of future net cash flows and an enhancement to our methodology for forecasting the amount and timing of future net cash flows from our Loan portfolio through the utilization of more recent data and new forecast variables. For additional information, see Note 6 to the consolidated financial statements contained in Part I - Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
The decrease in provision for credit losses related to new Consumer Loan assignments was primarily due to a 25.6% decrease in the average provision per Consumer Loan assignment, partially offset by a 17.8% increase in Consumer Loan
assignment unit volume. The decrease in the average provision per Consumer Loan assignment was primarily due to a decrease in the average advance rate for 2023 Consumer Loans.
Interest. The increase in interest expense of $41.8 million, or 55.4%, was primarily due to an increase in our average cost of debt, which was primarily the result of higher interest rates on recently-completed secured financings, as follows:
(Dollars in millions)
For the Six Months Ended June 30,
2023
2022
Change
Interest expense
$
117.2
$
75.4
$
41.8
Average outstanding debt principal balance (1)
4,685.2
4,704.8
(19.6)
Average cost of debt
5.0
%
3.2
%
1.8
%
(1) Includes the unamortized debt discount and excludes deferred debt issuance costs.
Provision for Claims. The increase in provision for claims of $16.5 million, or 78.2%, was primarily due to an increase in claims paid per reinsured vehicle service contract and an increase in the size of our reinsurance portfolio.
Provision for Income Taxes. For the six months ended June 30, 2023, our effective income tax rate decreased to 21.3% from 24.6% for the six months ended June 30, 2022. The decrease was primarily due to the impact of tax benefits related to our stock-based compensation plan and the settlement of an uncertain tax position for state income taxes during the second quarter of 2023, partially offset by an increase in non-deductible executive compensation expense. For additional information, see Note 11 to the consolidated financial statements contained in Part I - Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
Properties
The COVID-19 pandemic had a significant impact on our work environment, as the vast majority of our team members began working remotely. Because our remote operations and processes proved successful early on, we now pursue a “remote first” strategy to take advantage of the national talent pool and an increased rate of team member satisfaction. While remote work has become the primary experience for most of our team members, we do have team members that, due to their personal preference or the nature of their responsibilities, have continued to work primarily in one of our office properties. Additionally, we have various on-site meetings, events, and team building activities for which in-person attendance is encouraged. Therefore, we believe we will always have a need for some amount of office space.
As a result of the “remote first” strategy, we have excess space in the two office buildings that we own in Southfield, Michigan. We are actively exploring options to reduce our office space, which could result in the sale of one or both of our buildings. As there is currently a significant amount of unoccupied office space in Southfield, we believe the market value of our buildings and improvements, land and land improvements, and office furniture and equipment is significantly less than their combined carrying value of $36.3 million. If we were to reclassify one or both of these buildings as held for sale, we would be required to record an impairment charge to reduce the carrying value of the buildings held for sale to their estimated market value less costs to sell.
Liquidity 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) our revolving secured line of credit facility; (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 of June 30, 2023. For information regarding these financings and the covenants included in the related documents, see Note 9 to the consolidated financial statements contained in Part I - Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
On March 16, 2023, we completed a $400.0 million Term ABS financing, which was used to repay outstanding indebtedness and for general corporate purposes. The financing has an expected average annualized cost of 7.3% (including the initial purchasers’ fees and other costs), and it will revolve for 24 months, after which it will amortize based upon the cash flows on the underlying Loans.
On April 28, 2023, we extended the date on which our $400.0 million Warehouse Facility II will cease to revolve from April 30, 2024 to April 30, 2026. The interest rate on borrowings under the facility has been increased from LIBOR plus 175 basis points to SOFR plus 230 basis points.
On May 25, 2023, we completed a $400.0 million Term ABS financing, which was used to repay outstanding indebtedness and for general corporate purposes. The financing has an expected average annualized cost of 6.8% (including the initial purchasers’ fees and other costs), and it will revolve for 24 months, after which it will amortize based upon the cash flows on the underlying Loans.
On June 22, 2023, we extended the maturity of our revolving secured line of credit facility from June 22, 2025 to June 22, 2026. Prior to this amendment, the amount of the facility was set to decrease by $25.0 million on June 22, 2023; however, this amendment increased the amount of the facility by $5.0 million, resulting in a net decrease of $20.0 million, from $410.0 million to $390.0 million.
Cash and cash equivalents were $3.2 million as of June 30, 2023 and $7.7 million as of December 31, 2022. As of June 30, 2023 and December 31, 2022, we had $1,416.1 million and $1,554.1 million, respectively, in unused and available lines of credit. Our total balance sheet indebtedness increased to $4,746.6 million as of June 30, 2023 from $4,590.7 million as of December 31, 2022.
A summary of our scheduled principal debt maturities as of June 30, 2023 is as follows:
(In millions)
Year
Scheduled Principal Debt Maturities (1)
Remainder of 2023
$
720.3
2024
1,312.4
2025
1,565.8
2026
1,168.7
2027
0.6
Over five years
6.3
Total
$
4,774.1
(1)The principal maturities of certain financings are estimated based on forecasted collections.
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.
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. Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022 discusses several critical accounting estimates, which we believe involve a high degree of judgment and complexity. There have been no material changes to the estimates and assumptions associated with these accounting estimates from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2022, except as described below:
During the second quarter of 2023, we adjusted our methodology for forecasting the amount and timing of future net cash flows from our Loan portfolio through the utilization of more recent Consumer Loan performance and Consumer Loan prepayment data. During the first half of 2023, we experienced a decrease in Consumer Loan prepayments to below-average levels and as a result, slowed our forecasted net cash flow timing. Historically, Consumer Loan prepayments have been lower in periods with less availability of consumer credit. Changes in the amount and timing of forecasted net cash flows are recognized in the period of change through provision for credit losses. The implementation of the adjustment to our forecasting
methodology during the second quarter of 2023 reduced forecasted net cash flows by $44.5, or 0.5%, million and increased provision for credit losses by $71.3 million.
Forward-Looking Statements
We make forward-looking statements in this report and may make such statements in future filings with the Securities and Exchange Commission (“SEC”). 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 our Annual Report on Form 10-K for the year ended December 31, 2022, other risk factors discussed herein or listed from time to time in our reports filed with the SEC, and the following:
Industry, Operational and Macroeconomic Risks
•Our inability to accurately forecast and estimate the amount and timing of future collections could have a material adverse effect on results of operations.
•Due to competition from traditional financing sources and non-traditional lenders, we may not be able to compete successfully.
•An outbreak of contagious disease, such as the COVID-19 pandemic, or other public health emergency could materially and adversely affect our business, financial condition, liquidity, and results of operations.
•Reliance on third parties to administer our ancillary product offerings could adversely affect our business and financial results.
•We are dependent on our senior management and the loss of any of these individuals or an inability to hire additional team members could adversely affect our ability to operate profitably.
•Our reputation is a key asset to our business, and our business may be affected by how we are perceived in the marketplace.
•The concentration of our dealers in several states could adversely affect us.
•Reliance on our outsourced business functions could adversely affect our business.
•Our ability to hire and retain foreign engineering personnel could be hindered by immigration restrictions.
•We may be unable to execute our business strategy due to current economic conditions.
•Adverse changes in economic conditions, the automobile or finance industries, or the non-prime consumer market could adversely affect our financial position, liquidity, and results of operations, the ability of key vendors that we depend on to supply us with services, and our ability to enter into future financing transactions.
•Natural disasters, climate change, military conflicts, acts of war, terrorist attacks and threats, or the escalation of military activity in response to terrorist attacks or otherwise may negatively affect our business, financial condition, and results of operations.
•Governmental or market responses to climate change and related environmental issues could have a material adverse effect on our business.
•A small number of our shareholders have the ability to significantly influence matters requiring shareholder approval and such shareholders have interests which may conflict with the interests of our other security holders.
Capital and Liquidity Risks
•We may be unable to continue to access or renew funding sources and obtain capital needed to maintain and grow our business.
•The terms of our debt limit how we conduct our business.
•A violation of the terms of our asset-backed secured financings or revolving secured warehouse facilities could have a material adverse impact on our operations.
•Our substantial debt could negatively impact our business, prevent us from satisfying our debt obligations, and adversely affect our financial condition.
•We may not be able to generate sufficient cash flows to service our outstanding debt and fund operations and may be forced to take other actions to satisfy our obligations under such debt.
•Interest rate fluctuations may adversely affect our borrowing costs, profitability, and liquidity.
•The phaseout of the London Interbank Offered Rate (“LIBOR”), or the replacement of LIBOR with a different reference rate, could result in a material adverse effect on our business.
•Reduction in our credit rating could increase the cost of our funding from, and restrict our access to, the capital markets and adversely affect our liquidity, financial condition, and results of operations.
•We may incur substantially more debt and other liabilities. This could exacerbate further the risks associated with our current debt levels.
•The conditions of the U.S. and international capital markets may adversely affect lenders with which we have relationships, causing us to incur additional costs and reducing our sources of liquidity, which may adversely affect our financial position, liquidity, and results of operations.
Technology and Cybersecurity Risks
•Our dependence on technology could have a material adverse effect on our business.
•Our use of electronic contracts could impact our ability to perfect our ownership or security interest in Consumer Loans.
•Failure to properly safeguard confidential consumer and team member information could subject us to liability, decrease our profitability, and damage our reputation.
Legal and Regulatory Risks
•Litigation we are involved in from time to time may adversely affect our financial condition, results of operations, and cash flows.
•Changes in tax laws and the resolution of uncertain income tax matters could have a material adverse effect on our results of operations and cash flows from operations.
•The regulations to which we are or may become subject could result in a material adverse effect on our business.
Other factors not currently anticipated by management may also materially and adversely affect our business, financial condition, and results of operations. We do not undertake, and expressly disclaim any obligation, to update or alter our statements whether as a result of new information, future events, or otherwise, except as required by applicable law.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Refer to our Annual Report on Form 10-K for the year ended December 31, 2022 for a complete discussion of our market risk. There have been no material changes to the market risk information included in our Annual Report on Form 10-K for the year ended December 31, 2022.
ITEM 4. CONTROLS AND PROCEDURES.
(a) Disclosure Controls and Procedures. Our management, with the participation of our principal executive and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, our principal executive and principal financial officer has concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing, and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Internal Control Over Financial Reporting. There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
In the normal course of business and as a result of the consumer-oriented nature of the industry in which we operate, we and other industry participants are frequently subject to various consumer claims, litigation, and regulatory investigations seeking damages, fines, and statutory penalties. The claims allege, among other theories of liability, violations of state, federal, and foreign truth-in-lending, credit availability, credit reporting, consumer protection, warranty, debt collection, insurance, and other consumer-oriented laws and regulations, including claims seeking damages for alleged physical and mental harm relating to the repossession and sale of consumers’ vehicles and other debt collection activities. As the assignee of Consumer Loans originated by Dealers, we may also be named as a co-defendant in lawsuits filed by consumers principally against Dealers. We may also have disputes and litigation with Dealers. The claims may allege, among other theories of liability, that we breached our Dealer servicing agreement. We may also have disputes and litigation with vendors and other third parties. The claims may allege, among other theories of liability, that we breached a license agreement or contract. The damages, fines, and penalties that may be claimed by consumers, regulatory agencies, Dealers, vendors, or other third parties in these types of matters can be substantial. The relief requested by plaintiffs varies but may include requests for compensatory, statutory, and punitive damages and injunctive relief, and plaintiffs may seek treatment as purported class actions. An adverse ultimate disposition in any action to which we are a party or otherwise subject could have a material adverse impact on our financial position, liquidity, and results of operations.
For a description of significant litigation to which we are a party, see Note 15 to the consolidated financial statements contained in Part I - Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
ITEM 1A. RISK FACTORS
The risk factor entitled “A violation of the terms of our Term ABS facilities or Warehouse facilities could have a material adverse impact on our operations” included in Item 1A - Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2022 was amended and restated in its entirety in our Quarterly Report on Form 10‑Q for the quarterly period ended March 31, 2023 as follows:
A violation of the terms of our Term ABS financings or Warehouse facilities could have a material adverse impact on our operations.
Under our Term ABS financings and our Warehouse facilities, (1) we have various obligations and covenants as seller, servicer, and custodian of the Loans conveyed thereunder and in our individual capacity and (2) the special purpose subsidiaries to which we convey Loans have various obligations and covenants. A violation of any of these obligations or covenants in any of our Term ABS financings or our Warehouse facilities by us or the special purpose subsidiaries, respectively, may result in an early termination of the revolving period, repurchase or indemnification obligations on our part, and the termination of our servicing rights (and, accordingly, the loss of servicing fees), and may further result in amounts outstanding under such Term ABS financings and Warehouse facilities becoming immediately due and payable. In addition, the violation of any financial covenant under our revolving secured line of credit facility is an event of default or termination event under certain of our Term ABS financings and our Warehouse facilities.
The occurrence of any of the events described in the immediately-preceding paragraph could have a material adverse effect on our financial position, liquidity, and results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Stock Repurchases
The following table summarizes stock repurchases for the three months ended June 30, 2023:
ISSUER PURCHASES OF EQUITY SECURITIES
Period
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)
April 1 to April 30, 2023 (2)
424
$
484.04
—
158,069
May 1 to May 31, 2023
—
—
—
158,069
June 1 to June 30, 2023
15,802
484.78
15,802
142,267
Total
16,226
$
484.76
15,802
(1) On September 28, 2021, our board of directors authorized the repurchase by us from time to time of up to two million shares of our common stock (the "September 2021 Authorization"). The September 2021 Authorization, which was announced on October 1, 2021, does not have a specified expiration date. Repurchases under the September 2021 Authorization may be made in the open market, through privately negotiated transactions, through block trades, pursuant to trading plans adopted in accordance with Rule 10b5‑1 under the Securities Exchange Act of 1934 or otherwise.
(2) Total number of shares purchased includes 424 shares of common stock released to us by team members as payment of tax withholdings upon the conversion of restricted stock units to common stock and the vesting of restricted stock units.
ITEM 5. OTHER INFORMATION
During the quarter ended June 30, 2023, there were no Rule 10b5‑1 trading arrangements (as defined in Item 408(a) of Regulation S‑K) or non‑Rule 10b5‑1 trading arrangements (as defined in Item 408(c) of Regulation S‑K) adopted or terminated by any director or officer (as defined in Rule 16a‑1(f) under the Exchange Act) of Credit Acceptance Corporation.
Amendment No. 1 to the Seventh Amended and Restated Loan and Security Agreement, dated as of April 28, 2023, by and among the Company, CAC Warehouse Funding LLC II, and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.117 to the Company’s Current Report on Form 8-K filed May 4, 2023).
Indenture dated as of May 25, 2023, between Credit Acceptance Auto Loan Trust 2023 2 and Computershare Trust Company, N.A. (incorporated by reference to Exhibit 4.118 to the Company’s Current Report on Form 8 K filed June 1, 2023).
Backup Servicing Agreement, dated as of May 25, 2023, among the Company, Credit Acceptance Funding LLC 2023-2, Credit Acceptance Auto Loan Trust 2023-2, and Computershare Trust Company, N.A. (incorporated by reference to Exhibit 4.119 to the Company’s Current Report on Form 8-K filed June 1, 2023).
Sale and Contribution Agreement, dated as of May 25, 2023, between the Company and Credit Acceptance Funding LLC 2023-2 (incorporated by reference to Exhibit 4.121 to the Company’s Current Report on Form 8 K filed June 1, 2023).
Amended and Restated Trust Agreement, dated as of May 25, 2023, among Credit Acceptance Funding LLC 2023-2 and Computershare Delaware Trust Company (incorporated by reference to Exhibit 4.122 to the Company’s Current Report on Form 8-K filed June 1, 2023).
Sales and Servicing Agreement, dated as of May 25, 2023, among the Company, Credit Acceptance Auto Loan Trust 2023-2, Credit Acceptance Funding LLC 2023-2, and Computershare Trust Company, N.A. (incorporated by reference to Exhibit 4.123 to the Company’s Current Report on Form 8-K filed June 1, 2023).
Eleventh Amendment to Sixth Amended and Restated Credit Agreement, dated as of June 22, 2023, by and among the Company, Comerica Bank and the other banks signatory thereto, and Comerica Bank, as administrative agent for the banks (incorporated by reference to Exhibit 4.124 to the Company’s Current Report on Form 8-K filed June 28, 2023).
Amendment No. 2 to Loan and Security Agreement, dated as of May 15, 2023, by and among the Company, Credit Acceptance Funding LLC 2019 2, and Wells Fargo Bank, National Association.
Ninth Amendment to Loan and Security Agreement, dated as of July 10, 2023, by and among the Company, CAC Warehouse Funding LLC V, and Fifth Third Bank, National Association.
Fourth Amendment to Loan and Security Agreement, dated as of July 10, 2023, by and among the Company, Credit Acceptance Funding LLC 2021-1, and Fifth Third Bank, National Association.
Certification of principal executive officer and principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
