# Credit Acceptance Corp: Form 10-Q for the period ended Mar 31, 2024

- Company: [Credit Acceptance Corp](/companies/cacc.md) (CIK 885550)
- Form: 10-Q
- Filed: 2024-04-30
- Accepted by EDGAR: Apr 30, 2024, 16:06 ET
- Period: 2024-03-31
- Accession: 0000885550-24-000069
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/885550/000088555024000069/cacc-20240331.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/885550/000088555024000069/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2024-01-01 to 2024-03-31 | $508.0m | us-gaap:Revenues |
| Interest expense | 3 months, 2024-01-01 to 2024-03-31 | $92.5m | us-gaap:InterestExpense |
| Income tax | 3 months, 2024-01-01 to 2024-03-31 | $22.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-01-01 to 2024-03-31 | $64.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-01-01 to 2024-03-31 | $5.08 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-01-01 to 2024-03-31 | $5.15 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-01-01 to 2024-03-31 | 12,646,529 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2024-01-01 to 2024-03-31 | $310.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2024-01-01 to 2024-03-31 | $300.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 3 months, 2024-01-01 to 2024-03-31 | $191.1m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2024-03-31 | $8.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2024-03-31 | $8.10bn | us-gaap:Assets |
| Total liabilities | at 2024-03-31 | $6.44bn | us-gaap:Liabilities |
| Shareholders' equity | at 2024-03-31 | $1.65bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 44,984 characters.

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 2023 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 make vehicle ownership possible by providing innovative financing solutions 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 March 31, 2024, consolidated net income was $64.3 million, or $5.08 per diluted share, compared to consolidated net income of $99.5 million, or $7.61 per diluted share, for the same period in 2023, primarily due to increases in provision for credit losses and interest expense, partially offset by an increase in finance charges. Our results for the three months ended March 31, 2024 included:

- ***A decrease in forecasted collection rates***

The decrease in forecasted collection rates decreased forecasted net cash flows from our Loan portfolio by $30.8 million, or 0.3%, compared to stable forecasted collection rates during the first quarter of 2023 that increased forecasted net cash flows from our Loan portfolio by $9.4 million, or 0.1%.

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

Forecasted profitability was lower than our estimates at March 31, 2023, due to a decline in forecasted collection rates since the first quarter of 2023 and slower forecasted net cash flow timing during 2023 and the first quarter of 2024, primarily as a result of a decrease in Consumer Loan prepayments, which remain at below-average levels.

- ***Growth in Consumer Loan assignment volume and the average balance of our Loan portfolio***

Unit and dollar volumes grew 24.1% and 20.2%, respectively, as compared to the first quarter of 2023. The average balance of our Loan portfolio, which is our largest-ever, increased 11.7% as compared to the first quarter of 2023.

- ***An increase in the initial spread on Consumer Loan assignments***

The initial spread increased to 22.0% compared to 21.0% on Consumer Loans assigned in the first quarter of 2023.

- ***An increase in our average cost of debt***

Our average cost of debt increased from 4.7% to 7.0%, primarily a result of higher interest rates on recently-completed or -extended secured financings and recently-issued senior notes and the repayment of older secured financings and senior notes with lower interest rates.

- ***A decrease in common shares outstanding due to stock repurchases***

Since the first quarter of 2023, we have repurchased approximately 728,000 shares, or 5.7% of the shares outstanding as of March 31, 2023.

### Critical Success Factors

Critical success factors include our ability to accurately forecast Consumer Loan performance, access capital on acceptable terms, and maintain or grow Consumer Loan volume at the level and on the terms that we anticipate, with 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 for each Consumer Loan subsequent to assignment. Our evaluation becomes more accurate as the Consumer Loans age, as we use actual performance data in our forecast. By comparing our current expected collection rate for each Consumer Loan with the rate we projected at the time of assignment, we are able to assess the accuracy of our initial forecast. The following table compares our aggregated forecast of Consumer Loan collection rates as of March 31, 2024, with the aggregated forecasts as of December 31, 2023 and at the time of assignment, segmented by year of assignment:

| Consumer Loan Assignment Year | Forecasted Collection Percentage as of (1) March 31, 2024 | December 31, 2023 | Initial Forecast | Current Forecast Variance from December 31, 2023 | Initial Forecast |
| --- | ---: | ---: | ---: | ---: | ---: |
| 2015 | 65.3% | 65.2% | 67.7% | 0.1% | -2.4% |
| 2016 | 63.8% | 63.8% | 65.4% | 0.0% | -1.6% |
| 2017 | 64.7% | 64.7% | 64.0% | 0.0% | 0.7% |
| 2018 | 65.5% | 65.5% | 63.6% | 0.0% | 1.9% |
| 2019 | 67.0% | 66.9% | 64.0% | 0.1% | 3.0% |
| 2020 | 67.7% | 67.6% | 63.4% | 0.1% | 4.3% |
| 2021 | 64.3% | 64.5% | 66.3% | -0.2% | -2.0% |
| 2022 | 62.1% | 62.7% | 67.5% | -0.6% | -5.4% |
| 2023 | 67.2% | 67.4% | 67.5% | -0.2% | -0.3% |
| 2024 | 66.9% | — | 66.9% | — | 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.

Consumer Loans assigned in 2018 through 2020 have yielded forecasted collection results significantly better than our initial estimates, while Consumer Loans assigned in 2015, 2016, 2021, and 2022 have yielded forecasted collection results significantly worse than our initial estimates. For all other assignment years presented, actual results have been close to our initial estimates. For the three months ended March 31, 2024, forecasted collection rates declined for Consumer Loans assigned in 2021 through 2023 and were generally consistent with expectations at the start of the period for all other assignment years presented.

The changes in forecasted collection rates for the three months ended March 31, 2024 and 2023 impacted forecasted net cash flows (forecasted collections less forecasted Dealer Holdback payments) as follows:

*(Dollars in millions)*

| Increase (Decrease) in Forecasted Net Cash Flows | For the Three Months Ended March 31, 2024 | 2023 |
| --- | ---: | ---: |
| Dealer loans | $(27.0) | $(7.2) |
| Purchased loans | (3.8) | 16.6 |
| Total | $(30.8) | $9.4 |
| % change from forecast at beginning of period | -0.3% | 0.1% |

We have experienced increased levels of uncertainty associated with our estimate of the amount and timing of future net cash flows from our Loan portfolio since the beginning of 2020, with realized collections underperforming our expectations during the early stages of the COVID-19 pandemic, outperforming our expectations following the distribution of federal stimulus payments and enhanced unemployment benefits, and underperforming our expectations during the current economic environment. Forecasting collection rates accurately is challenging, so we have designed our business model to produce acceptable levels of profitability across our portfolio, even if Loan performance is less than forecasted in the aggregate. For the period from January 1, 2020 through March 31, 2024, the cumulative change to our forecast of future net cash flows from our Loan portfolio has been a decrease of $17.0 million, or 0.2%, as shown in the following table:

*(Dollars in millions)*

| Three Months Ended | Increase (Decrease) in Forecasted Net Cash Flows Total Loans | % Change from Forecast at Beginning of Period |
| --- | ---: | ---: |
| March 31, 2020 | $(206.5) | -2.3% |
| June 30, 2020 | 24.4 | 0.3% |
| September 30, 2020 | 138.5 | 1.5% |
| December 31, 2020 | (2.7) | 0.0% |
| March 31, 2021 | 107.4 | 1.1% |
| June 30, 2021 | 104.5 | 1.1% |
| September 30, 2021 | 82.3 | 0.9% |
| December 31, 2021 | 31.9 | 0.3% |
| March 31, 2022 | 110.2 | 1.2% |
| June 30, 2022 | (43.4) | -0.5% |
| September 30, 2022 | (85.4) | -0.9% |
| December 31, 2022 | (41.1) | -0.5% |
| March 31, 2023 | 9.4 | 0.1% |
| June 30, 2023 | (89.3) | -0.9% |
| September 30, 2023 | (69.4) | -0.7% |
| December 31, 2023 | (57.0) | -0.6% |
| March 31, 2024 | (30.8) | -0.3% |
| Total | $(17.0) | -0.2% |

44

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

| Consumer Loan Assignment Year | Average Consumer Loan (1) | Advance (2) | Initial Loan Term (in months) | Total Assignment Volume Unit Volume | Dollar Volume (2) (in millions) |
| --- | ---: | ---: | ---: | ---: | ---: |
| 2015 | $16,354 | $7,272 | 50 | 298,288 | $2,167.0 |
| 2016 | 18,218 | 7,976 | 53 | 330,710 | 2,635.5 |
| 2017 | 20,230 | 8,746 | 55 | 328,507 | 2,873.1 |
| 2018 | 22,158 | 9,635 | 57 | 373,329 | 3,595.8 |
| 2019 | 23,139 | 10,174 | 57 | 369,805 | 3,772.2 |
| 2020 | 24,262 | 10,656 | 59 | 341,967 | 3,641.2 |
| 2021 | 25,632 | 11,790 | 59 | 268,730 | 3,167.8 |
| 2022 | 27,242 | 12,924 | 60 | 280,467 | 3,625.3 |
| 2023 | 27,025 | 12,475 | 61 | 332,499 | 4,147.8 |
| 2024 (3) | 26,318 | 11,813 | 61 | 111,488 | 1,317.0 |

(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) Represents activity for the three months ended March 31, 2024. Information in this table for each of the years prior to 2024 represents activity for all 12 months of that year.

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 across our portfolio, even if collection rates are less than we initially forecast.

The following table presents aggregate forecasted Consumer Loan collection rates, advance rates, and spreads (the forecasted collection rate less the advance rate), and the percentage of the forecasted collections that had been realized as of March 31, 2024, as well as forecasted collection rates and spreads at the time of assignment. All amounts, unless otherwise noted, are presented as a percentage of the initial balance of the Consumer Loan (principal + interest). The table includes both Dealer Loans and Purchased Loans.

| Consumer Loan Assignment Year | Forecasted Collection % as of March 31, 2024 | Initial Forecast | Advance % (1) | Spread % as of March 31, 2024 | Initial Forecast | % of Forecast Realized (2) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| 2015 | 65.3% | 67.7% | 44.5% | 20.8% | 23.2% | 99.5% |
| 2016 | 63.8% | 65.4% | 43.8% | 20.0% | 21.6% | 99.2% |
| 2017 | 64.7% | 64.0% | 43.2% | 21.5% | 20.8% | 98.8% |
| 2018 | 65.5% | 63.6% | 43.5% | 22.0% | 20.1% | 97.5% |
| 2019 | 67.0% | 64.0% | 44.0% | 23.0% | 20.0% | 93.9% |
| 2020 | 67.7% | 63.4% | 43.9% | 23.8% | 19.5% | 86.3% |
| 2021 | 64.3% | 66.3% | 46.0% | 18.3% | 20.3% | 73.4% |
| 2022 | 62.1% | 67.5% | 47.4% | 14.7% | 20.1% | 49.9% |
| 2023 | 67.2% | 67.5% | 46.2% | 21.0% | 21.3% | 21.8% |
| 2024 | 66.9% | 66.9% | 44.9% | 22.0% | 22.0% | 2.5% |

(1) Represents advances paid to Dealers on Consumer Loans assigned under our Portfolio Program and one-time payments made to Dealers to purchase Consumer Loans assigned under our Purchase Program as a percentage of the initial balance of the Consumer Loans. Payments of Dealer Holdback and accelerated Dealer Holdback are not included.

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

The risk of a material change in our forecasted collection rate declines as the Consumer Loans age. For 2019 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 March 31, 2024 and the advance rate ranges from 14.7% to 23.8%, 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 2024 Consumer Loans relative to 2023 Consumer Loans as of March 31, 2024 was primarily a result of a higher initial spread on 2024 Consumer Loans, which was due to a decrease in the advance rate, partially offset by a lower initial forecast. Additionally, the performance of 2023 Consumer Loans has been lower than our initial estimates.

The following table compares our forecast of aggregate Consumer Loan collection rates as of March 31, 2024 with the forecasts at the time of assignment, for Dealer Loans and Purchased Loans separately:

| Consumer Loan Assignment Year | Dealer Loans Forecasted Collection Percentage as of (1) March 31, 2024 | Initial Forecast | Variance | Purchased Loans Forecasted Collection Percentage as of (1) March 31, 2024 | Initial Forecast | Variance |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| 2015 | 64.6% | 67.5% | -2.9% | 68.9% | 68.5% | 0.4% |
| 2016 | 63.0% | 65.1% | -2.1% | 66.1% | 66.5% | -0.4% |
| 2017 | 64.0% | 63.8% | 0.2% | 66.3% | 64.6% | 1.7% |
| 2018 | 64.9% | 63.6% | 1.3% | 66.8% | 63.5% | 3.3% |
| 2019 | 66.7% | 63.9% | 2.8% | 67.7% | 64.2% | 3.5% |
| 2020 | 67.5% | 63.3% | 4.2% | 67.9% | 63.6% | 4.3% |
| 2021 | 64.1% | 66.3% | -2.2% | 64.8% | 66.3% | -1.5% |
| 2022 | 61.4% | 67.3% | -5.9% | 63.8% | 68.0% | -4.2% |
| 2023 | 66.1% | 66.8% | -0.7% | 70.0% | 69.4% | 0.6% |
| 2024 | 66.0% | 66.0% | 0.0% | 70.0% | 69.9% | 0.1% |

(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.

The following table presents aggregate forecasted Consumer Loan collection rates, advance rates, and spreads (the forecasted collection rate less the advance rate) as of March 31, 2024 for Dealer Loans and Purchased Loans separately. All amounts are presented as a percentage of the initial balance of the Consumer Loan (principal + interest).

| Consumer Loan Assignment Year | Dealer Loans Forecasted Collection % (1) | Advance % (1)(2) | Spread % | Purchased Loans Forecasted Collection % (1) | Advance % (1)(2) | Spread % |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| 2015 | 64.6% | 43.4% | 21.2% | 68.9% | 50.2% | 18.7% |
| 2016 | 63.0% | 42.1% | 20.9% | 66.1% | 48.6% | 17.5% |
| 2017 | 64.0% | 42.1% | 21.9% | 66.3% | 45.8% | 20.5% |
| 2018 | 64.9% | 42.7% | 22.2% | 66.8% | 45.2% | 21.6% |
| 2019 | 66.7% | 43.1% | 23.6% | 67.7% | 45.6% | 22.1% |
| 2020 | 67.5% | 43.0% | 24.5% | 67.9% | 45.5% | 22.4% |
| 2021 | 64.1% | 45.1% | 19.0% | 64.8% | 47.7% | 17.1% |
| 2022 | 61.4% | 46.4% | 15.0% | 63.8% | 50.1% | 13.7% |
| 2023 | 66.1% | 44.8% | 21.3% | 70.0% | 49.8% | 20.2% |
| 2024 | 66.0% | 44.0% | 22.0% | 70.0% | 48.3% | 21.7% |

(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 March 31, 2024 on 2024 Dealer Loans was 22.0%, as compared to a spread of 21.3% on 2023 Dealer Loans. The increase was due to Consumer Loan performance, as the performance of 2023 Dealer Loans has been lower than our initial estimates.

The spread as of March 31, 2024 on 2024 Purchased Loans was 21.7%, as compared to a spread of 20.2% on 2023 Purchased Loans. The increase was primarily a result of a higher initial spread on 2024 Purchased Loans, due to a lower advance rate and higher initial forecast. The increase was partially offset by Consumer Loan performance, as the performance of 2023 Purchased Loans has exceeded our initial estimates.

### 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 3.4 to 1 as of March 31, 2024. 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 five quarters as compared to the same period in the previous year:

| Three Months Ended | Year over Year Percent Change Unit Volume | Dollar Volume (1) |
| --- | ---: | ---: |
| March 31, 2023 | 22.8% | 18.6% |
| June 30, 2023 | 12.8% | 8.3% |
| September 30, 2023 | 13.0% | 10.5% |
| December 31, 2023 | 26.7% | 21.3% |
| March 31, 2024 | 24.1% | 20.2% |

(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 24.1% and 20.2%, respectively, during the first quarter of 2024 as the number of active Dealers grew 10.5% and the average unit volume per active Dealer increased 12.0%. Dollar volume increased less than unit volume during the first quarter of 2024 due to a decrease in the average advance paid, due to decreases in the average advance rate and the average size of Consumer Loans assigned. Unit volume for the 28-day period ended April 28, 2024 grew 11.4% compared to the same period in 2023.

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

|  | For the Three Months Ended March 31, 2024 | 2023 | % Change |
| --- | ---: | ---: | ---: |
| Consumer Loan unit volume | 111,488 | 89,821 | 24.1% |
| Active Dealers (1) | 10,805 | 9,775 | 10.5% |
| Average volume per active Dealer | 10.3 | 9.2 | 12.0% |
| Consumer Loan unit volume from Dealers active both periods | 86,596 | 75,422 | 14.8% |
| Dealers active both periods | 6,744 | 6,744 | — |
| Average volume per Dealer active both periods | 12.8 | 11.2 | 14.8% |
| Consumer Loan unit volume from Dealers not active both periods | 24,892 | 14,399 | 72.9% |
| Dealers not active both periods | 4,061 | 3,031 | 34.0% |
| Average volume per Dealer not active both periods | 6.1 | 4.8 | 27.1% |

(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 March 31, 2024 | 2023 | % Change |
| --- | ---: | ---: | ---: |
| Consumer Loan unit volume from new active Dealers | 5,193 | 5,268 | -1.4% |
| New active Dealers (1) | 1,310 | 1,158 | 13.1% |
| Average volume per new active Dealer | 4.0 | 4.5 | -11.1% |
| Attrition (2) | -16.0% | -13.8% |  |

(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 five quarters:

| Three Months Ended | Unit Volume Dealer Loans | Purchased Loans | Dollar Volume (1) Dealer Loans | Purchased Loans |
| --- | ---: | ---: | ---: | ---: |
| March 31, 2023 | 72.1% | 27.9% | 68.1% | 31.9% |
| June 30, 2023 | 72.4% | 27.6% | 68.6% | 31.4% |
| September 30, 2023 | 74.8% | 25.2% | 71.7% | 28.3% |
| December 31, 2023 | 77.2% | 22.8% | 75.0% | 25.0% |
| March 31, 2024 | 78.2% | 21.8% | 76.6% | 23.4% |

(1) Represents advances paid to Dealers on Consumer Loans assigned under our Portfolio Program and one-time payments made to Dealers to purchase Consumer Loans assigned under our Purchase Program. Payments of Dealer Holdback and accelerated Dealer Holdback are not included.

As of March 31, 2024 and December 31, 2023, the net Dealer Loans receivable balance was 69.2% and 67.7%, respectively, of the total net Loans receivable balance.

### Results of Operations

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

- a significant provision for credit losses expense at the time of the Loan’s assignment to us for contractual net cash flows we do not expect to realize; and
- finance charge revenue in subsequent periods that is significantly in excess of our expected yield.

Due to the GAAP treatment of contractual net cash flows we do not expect to realize at the time of loan assignment (i.e. significant expense at the time of loan assignment, which is offset by higher revenue in subsequent periods), we do not believe the GAAP methodology we employ provides sufficient transparency into the economics of our business. For additional information, see Note 3 and Note 6 to the consolidated financial statements contained in Part I - Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

#### Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023

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)*

| Revenue: | For the Three Months Ended March 31, 2024 | 2023 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Finance charges | $469.2 | $421.1 | $48.1 | 11.4% |
| Premiums earned | 21.9 | 17.4 | 4.5 | 25.9% |
| Other income | 16.9 | 15.3 | 1.6 | 10.5% |
| Total revenue | 508.0 | 453.8 | 54.2 | 11.9% |
| **Costs and expenses:** |  |  |  |  |
| Salaries and wages | 78.5 | 77.2 | 1.3 | 1.7% |
| General and administrative | 23.7 | 18.0 | 5.7 | 31.7% |
| Sales and marketing | 23.9 | 22.1 | 1.8 | 8.1% |
| Total operating expenses | 126.1 | 117.3 | 8.8 | 7.5% |
| Provision for credit losses on forecast changes | 87.2 | 44.3 | 42.9 | 96.8% |
| Provision for credit losses on new Consumer Loan assignments | 98.8 | 93.1 | 5.7 | 6.1% |
| Total provision for credit losses | 186.0 | 137.4 | 48.6 | 35.4% |
| Interest | 92.5 | 54.4 | 38.1 | 70.0% |
| Provision for claims | 17.0 | 17.9 | (0.9) | -5.0% |
| Total costs and expenses | 421.6 | 327.0 | 94.6 | 28.9% |
| Income before provision for income taxes | 86.4 | 126.8 | (40.4) | -31.9% |
| Provision for income taxes | 22.1 | 27.3 | (5.2) | -19.0% |
| Net income | $64.3 | $99.5 | $(35.2) | -35.4% |
| Net income per share: |  |  |  |  |
| Basic | $5.15 | $7.62 | $(2.47) | -32.4% |
| Diluted | $5.08 | $7.61 | $(2.53) | -33.2% |
| Weighted average shares outstanding: |  |  |  |  |
| Basic | 12,481,139 | 13,057,617 | (576,478) | -4.4% |
| Diluted | 12,646,529 | 13,073,316 | (426,787) | -3.3% |

50

*Finance Charges.* The increase of $48.1 million, or 11.4%, was primarily due to an increase in the average net Loans receivable balance, as follows:

*(Dollars in millions)*

|  | For the Three Months Ended March 31, 2024 | 2023 | Change |
| --- | ---: | ---: | ---: |
| Average net Loans receivable balance | $7,101.3 | $6,356.0 | $745.3 |
| Average yield on our Loan portfolio | 26.4% | 26.5% | -0.1% |

The following table summarizes the impact each component had on the overall increase in finance charges for the three months ended March 31, 2024:

*(In millions)*

| Impact on finance charges: | Year over Year Change For the Three Months Ended March 31, 2024 |
| --- | ---: |
| Due to an increase in the average net Loans receivable balance | $49.4 |
| Due to a decrease in the average yield | (1.3) |
| Total increase in finance charges | $48.1 |

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

*Premiums Earned.* The increase of $4.5 million, or 25.9%, was primarily due to growth in the size of our reinsurance portfolio, which resulted from growth in new Consumer Loan assignments and an increase in the average premium written per reinsured vehicle service contract in recent periods.

*Operating Expenses.* The increase of $8.8 million, or 7.5%, was primarily due to an increase in general and administrative expenses of $5.7 million, or 31.7%, primarily due to increases in legal and technology systems expenses.

*Provision for Credit Losses.* The increase of $48.6 million, or 35.4%, was due to increases in provision for credit losses on forecast changes and provision for credit losses on new Consumer Loan assignments.

We recognize provision for credit losses on new Consumer Loan assignments for contractual net cash flows that are not expected to be realized at the time of assignment. We also recognize provision for credit losses on forecast changes in the amount and timing of expected future net cash flows subsequent to assignment. The following table summarizes the provision for credit losses for each of these components:

*(In millions)*

| Provision for Credit Losses | For the Three Months Ended March 31, 2024 | 2023 | Change |
| --- | ---: | ---: | ---: |
| Forecast changes | $87.2 | $44.3 | $42.9 |
| New Consumer Loan assignments | 98.8 | 93.1 | 5.7 |
| Total | $186.0 | $137.4 | $48.6 |

The increase in provision for credit losses related to forecast changes was due to a decline in Consumer Loan performance and slower net cash flow timing during the first quarter of 2024 compared to the first quarter of 2023. During the first quarter of 2024, we decreased our estimate of future net cash flows by $30.8 million, or 0.3%, to reflect a decline in forecasted collection rates during the period and slowed our forecasted net cash flow timing to reflect a decrease in Consumer Loan prepayments, which remain at below-average levels. Historically, Consumer Loan prepayments have been lower in periods with less availability of consumer credit. During the first quarter of 2023, we increased our estimate of future net cash flows by $9.4 million, or 0.1%, to reflect stable forecasted collection rates during the period; however, we slowed our forecasted net cash flow timing to reflect a decrease in Consumer Loan prepayments.

The increase in provision for credit losses related to new Consumer Loan assignments was primarily due to a 24.1% increase in Consumer Loan assignment unit volume, partially offset by a 14.5% decrease in the average provision per Consumer Loan assignment. The decrease in the average provision per Consumer Loan assignment was primarily due to a decrease in the average advance rate for 2024 Consumer Loans.

*Interest.* The increase in interest expense of $38.1 million, or 70.0%, was due to:

- An increase in our average cost of debt, which was primarily a result of higher interest rates on recently-completed or -extended secured financings and recently-issued senior notes and the repayment of older secured financings and senior notes with lower interest rates.
- An increase in the average outstanding debt principal balance, which was primarily due to borrowing used to fund the growth of our loan portfolio and stock repurchases.

The following table presents the change in interest expense, average outstanding debt principal balance, and average cost of debt for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023:

*(Dollars in millions)*

|  | For the Three Months Ended March 31, 2024 | 2023 | Change |
| --- | ---: | ---: | ---: |
| Interest expense | $92.5 | $54.4 | $38.1 |
| Average outstanding debt balance (1) | 5,306.8 | 4,594.7 | 712.1 |
| Average cost of debt | 7.0% | 4.7% | 2.3% |

(1) Includes the unamortized debt discount.

*Provision for Income Taxes*. For the three months ended March 31, 2024, the effective income tax rate increased to 25.6% from 21.5% for the same period in 2023. The increase was primarily due to the impact of tax benefits recognized in 2023 related to our stock-based compensation plan. For additional information, see Note 12 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 have a continuing need for some amount of office space.

As a result of the “remote first” strategy, we have significant excess space in the two office buildings that we own, which are located in Southfield, Michigan. After exploring options to reduce our office space, we have made the preliminary decision to sell the larger building and consolidate into the smaller building that has served as our headquarters since 1993.

The building that we intend to sell is currently scheduled for auction in mid-May 2024. As there is currently a significant amount of unoccupied office space in our region, we do not know whether the auction will result in a sale of the building. Additionally, we believe the market value of the building and its improvements, together with the related land and land improvements and office furniture and equipment, is significantly less than the carrying value of $27.5 million. We have evaluated the facts and circumstances of the potential auction sale, and we do not believe that the building currently meets all of the criteria necessary for us to reclassify it as held for sale. If we were to reclassify the building as held for sale, we would record an impairment charge to reduce its carrying value to its 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 March 31, 2024. For information regarding these financings and the covenants included in the related documents, see Note 10 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 February 16, 2024, we extended the $100.0 million Term ABS financing that we entered into on January 29, 2021 and to which we refer as Term ABS 2021-1. Under the amendment effecting the extension, the date on which the financing will cease to revolve has been extended from December 16, 2024 to February 17, 2026.

On February 27, 2024, we completed a $200.0 million Term ABS financing, which was used to repay outstanding indebtedness and for general corporate purposes. The financing has an expected average annualized cost of 7.8% (including placement agent fees and other costs), and it will revolve for 36 months, after which it will amortize based upon the cash flows on the underlying Loans.

On March 28, 2024, we completed a $500.0 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 6.4% (including 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.

Cash and cash equivalents were $8.4 million as of March 31, 2024 and $13.2 million as of December 31, 2023. As of March 31, 2024 and December 31, 2023, we had $1,355.5 million and $1,505.8 million, respectively, in unused and available lines of credit. Our total balance sheet indebtedness increased to $5,611.5 million as of March 31, 2024 from $5,067.5 million as of December 31, 2023.

A summary of our scheduled principal debt maturities as of March 31, 2024 is as follows:

*(In millions)*

| Year | Scheduled Principal Debt Maturities (1) |
| --- | ---: |
| Remainder of 2024 | $627.8 |
| 2025 | 1,800.9 |
| 2026 | 2,094.4 |
| 2027 | 519.1 |
| 2028 | 610.1 |
| Over five years | — |
| Total | $5,652.3 |

(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, 2023 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, 2023.

### 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, 2023, 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.
- 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.
- 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.
- An outbreak of contagious disease or other public health emergency could materially and adversely affect our business, financial condition, liquidity, and results of operations.
- The concentration of 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.
- 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.
- 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.
- We depend on secure information technology, and a breach of our systems or those of our third-party service providers could result in our experiencing significant financial, legal, and reputational exposure and could materially adversely affect our business, financial condition, and results of operations.
- 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.

## Market risk

As filed, 270 characters.

Refer to our Annual Report on Form 10-K for the year ended December 31, 2023 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, 2023.

## Controls and procedures

As filed, 1,501 characters.

(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 officer and principal financial officer have 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.

Filed Apr 30, 2024.
Source: SEC EDGAR, the filing index for accession 0000885550-24-000069. Last ingested by Listed: Nov 6, 2026, 17:50 ET. No prices; not investment advice.