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Senior Notes
On December 19, 2023, we issued $600.0 million aggregate principal amount of 9.250 % senior notes due 2028 (the “2028 senior notes”). The 2028 senior notes were issued pursuant to an indenture, dated as of December 19, 2023, 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 the trustee under the indenture.
The 2028 senior notes mature on December 15, 2028 and bear interest at a rate of 9.250 % per annum, computed on the basis of a 360-day year composed of twelve 30-day months and payable semi-annually on June 15 and December 15 of each year, beginning on June 15, 2024. We used a portion of the net proceeds from the 2028 senior notes to repurchase or redeem all of the $400.0 million outstanding principal amount of our 5.125 % senior notes due 2024 (the “2024 senior notes”), of which $322.3 million was repurchased on December 19, 2023 and the remaining $77.7 million was redeemed on December 31, 2023. We used the remaining net proceeds from the 2028 senior notes for general corporate purposes. During the fourth quarter of 2023, we recognized a pre-tax loss on extinguishment of debt of $1.8 million related to the repurchase and redemption of the 2024 senior notes.
On 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 the trustee under the indenture.
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 2028 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.
Mortgage Note
We had a $9.0 million mortgage note with a commercial bank that was 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 was paid off in full during the second quarter of 2024 in connection with the sale of the related building.
Debt Covenants
As of September 30, 2024, 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 September 30, 2024, we were in compliance with our covenants under our Term ABS financings, the senior notes indentures, and the RTP facility.
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11. 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 interest rate cap agreements that were in effect as of September 30, 2024 and December 31, 2023:
| (Dollars in millions) | ||||||||||||||||||||||||||||||||||||||
| As of September 30, 2024 | ||||||||||||||||||||||||||||||||||||||
| Facility Amount | Facility Name | Purpose | Start | End | Notional | Cap Interest Rate (1) | ||||||||||||||||||||||||||||||||
| $ | Warehouse Facility IV | Cap Floating Rate | 05/2023 | 11/2024 | $ | % | ||||||||||||||||||||||||||||||||
| Warehouse Facility V | Cap Floating Rate | 04/2023 | 01/2026 | % | ||||||||||||||||||||||||||||||||||
| Warehouse Facility VIII | Cap Floating Rate | 09/2022 | 09/2025 | % | ||||||||||||||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||||||||||||
| As of December 31, 2023 | ||||||||||||||||||||||||||||||||||||||
| Facility Amount | Facility Name | Purpose | Start | End | Notional | Cap Interest Rate (1) | ||||||||||||||||||||||||||||||||
| $ | Warehouse Facility IV | Cap Floating Rate | 05/2023 | 11/2024 | $ | % | ||||||||||||||||||||||||||||||||
| Warehouse Facility V | Cap Floating Rate | 04/2023 | 01/2026 | % | ||||||||||||||||||||||||||||||||||
| Warehouse Facility VIII | Cap Floating Rate | 09/2022 | 9/2025 | % | ||||||||||||||||||||||||||||||||||
| Term ABS 2021-1 | Cap Floating Rate | 04/2023 | 06/2024 | % | ||||||||||||||||||||||||||||||||||
| Term ABS 2022-2 | Cap Floating Rate | 12/2022 | 06/2024 | % | ||||||||||||||||||||||||||||||||||
(1)Rate excludes the spread over the corresponding benchmark rate.
The interest rate caps have not been designated as hedging instruments. As of September 30, 2024 and December 31, 2023, the fair value of the interest rate caps was negligible, as the capped rates were above market rates.
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12. 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 September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| U.S. federal statutory income tax rate | % | % | % | % | |||||||||||||||||||
| State and local income taxes | % | % | % | % | |||||||||||||||||||
| Non-deductible executive compensation expense | % | % | % | % | |||||||||||||||||||
| Excess tax benefits from stock-based compensation | % | % | - | % | - | % | |||||||||||||||||
| Other | % | % | % | % | |||||||||||||||||||
| Effective income tax rate | % | % | % | % | |||||||||||||||||||
State and local income taxes
For the three months ended September 30, 2024, the impact of state and local income taxes on our effective income tax rate decreased from the same period in 2023, primarily due to the settlement of an uncertain tax position during the third quarter of 2024.
For the nine months ended September 30, 2024, the impact of state and local income taxes on our effective income tax rate increased from the same period in 2023, primarily due to:
•An adjustment to an uncertain tax position estimate during the second quarter of 2024, which increased our effective income tax rate by 230 basis points for the nine months ended September 30, 2024.
• Changes in state tax laws that were enacted during the second quarter of 2024, which are expected to increase our long-term effective tax rate by approximately 10 basis points. The enactment of these tax law changes increased our effective income tax rate by 70 basis points for the nine months ended September 30, 2024.
Non-deductible executive compensation expense
We recognize non-deductible executive compensation expense as an increase of provision for income taxes or a reduction of benefit for income taxes. For the nine months ended September 30, 2024, the impact of non-deductible executive compensation expense on our effective income tax rate increased from the same period in 2023, primarily due to a decrease in pre-tax income.
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 settled in 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 decrease in the impact of excess tax benefits on our effective income tax rate for the nine months ended September 30, 2024 was primarily due to a decrease in the number of restricted stock units that were settled in common stock during the first quarter of 2024 as compared to the first quarter of 2023 due to the timing of long-term stock award grants, partially offset by a decrease in pre-tax income.
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13. 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 September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Weighted average shares outstanding: | |||||||||||||||||||||||
| Common shares | |||||||||||||||||||||||
| Vested restricted stock units | |||||||||||||||||||||||
| Basic number of weighted average shares outstanding | |||||||||||||||||||||||
| Dilutive effect of restricted stock units and stock options | |||||||||||||||||||||||
| Dilutive number of weighted average shares outstanding | |||||||||||||||||||||||
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 September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Stock options | |||||||||||||||||||||||
| Restricted stock units | |||||||||||||||||||||||
| Total | |||||||||||||||||||||||
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14. STOCK REPURCHASES
The following table summarizes our stock repurchases for the three and nine months ended September 30, 2024 and 2023:
| (Dollars in millions) | For the Three Months Ended September 30, | |||||||||||||||||||||||||
| 2024 | 2023 | |||||||||||||||||||||||||
| Stock Repurchases | Number of Shares Repurchased | Cost (1) | Number of Shares Repurchased | Cost (1) | ||||||||||||||||||||||
| Open Market (2) | $ | $ | ||||||||||||||||||||||||
| Other (3) | ||||||||||||||||||||||||||
| Total | $ | $ | ||||||||||||||||||||||||
| (Dollars in millions) | For the Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2024 | 2023 | |||||||||||||||||||||||||
| Stock Repurchases | Number of Shares Repurchased | Cost (1) | Number of Shares Repurchased | Cost (1) | ||||||||||||||||||||||
| Open Market (2) | $ | $ | ||||||||||||||||||||||||
| Other (3) | ||||||||||||||||||||||||||
| Total | $ | $ | ||||||||||||||||||||||||
(1) Total cost of repurchases includes excise tax.
(2) 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 August 21, 2023, 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 September 30, 2024, we had authorization to repurchase 1,346,570 shares of our common stock.
(3) 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.
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15. STOCK-BASED COMPENSATION PLANS
| (In millions) | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||||||
| Stock options | $ | $ | $ | $ | ||||||||||||||||||||||
| Restricted stock units | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
Pursuant to our Amended and Restated Incentive Compensation Plan, we can grant stock-based awards in the form of restricted stock, restricted stock units, and stock options to team members, officers, directors, and contractors. Instead of a short-term compensation program providing for rolling, annual equity awards to our executive officers and senior leaders, we utilize a multi-year compensation program that grants a one-time equity award at the beginning of the compensation program period that is intended to incentivize recipients over the multi-year compensation period. Our current compensation program for executive officers and senior leaders covers the 2021 through 2024 compensation period and included a one-time equity award in December 2020 with a vesting period of four years. Based on the stock-based awards that are currently outstanding, we expect to recognize the future stock-based compensation expense as follows:
| (in millions) | ||||||||
| Year | Total Projected Stock-Based Compensation Expense | |||||||
| Remainder of 2024 | $ | |||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| Total | $ | |||||||
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16. 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 the 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 or they may file individual arbitration demands for which arbitration providers may request separate filing fees. 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, 2023.
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.
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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. On August 7, 2023, the court stayed the action pending the U.S. Supreme Court’s decision in Consumer Financial Protection Bureau v. Community Financial Services Association of America, Ltd., No. 22-448 (“CFSA”). On July 1, 2024, the court lifted the stay in view of the decision in CFSA and requested revised briefing on the Company’s motion to dismiss that would address the intervening legal developments and sharpen the issues for resolution. As of October 29, 2024, the Company's motion to dismiss has been fully briefed. 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.
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.
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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 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 September 30, 2024, consolidated net income was $78.8 million, or $6.35 per diluted share, compared to consolidated net income of $70.8 million, or $5.43 per diluted share, for the same period in 2023. The increase was primarily due to an increase in finance charges, partially offset by an increase in interest expense. Our results for the three months ended September 30, 2024 included:
•A similar decline in forecasted collection rates
A decline in forecasted collection rates decreased forecasted net cash flows from our Loan portfolio by $62.8 million, or 0.6%, compared to a decrease in forecasted collection rates during the third quarter of 2023 that decreased forecasted net cash flows from our Loan portfolio by $69.4 million, or 0.7%.
•A decrease in forecasted profitability for Consumer Loans assigned in 2021 through 2024
Forecasted profitability was lower than our estimates at September 30, 2023, due to both a decline in forecasted collection rates and slower forecasted net cash flow timing since the third quarter of 2023. The slower forecasted net cash flow timing was primarily 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 17.7% and 12.2%, respectively, as compared to the third quarter of 2023. The average balance of our Loan portfolio, which is our largest-ever, increased 14.9% as compared to the third quarter of 2023.
•An increase in the initial spread on Consumer Loan assignments
The initial spread increased to 21.9% compared to 21.4% on Consumer Loans assigned in the third quarter of 2023.
•An increase in our average cost of debt
Our average cost of debt increased from 5.8% to 7.3%, 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 third quarter of 2023, we have repurchased approximately 566,000 shares, or 4.5% of the shares outstanding as of September 30, 2023. There were no stock repurchases during the third quarter of 2024.
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For the nine months ended September 30, 2024, consolidated net income was $96.0 million, or $7.68 per diluted share, compared to consolidated net income of $192.5 million, or $14.73 per diluted share, for the same period in 2023. The decrease was primarily due to increases in interest expense and provision for credit losses on forecast changes, partially offset by an increase in finance charges. Our results for the nine months ended September 30, 2024 included:
•A larger decline in forecasted collection rates
The decline in forecasted collection rates decreased forecasted net cash flows from our Loan portfolio by $282.9 million, or 2.8%, compared to a decrease in forecasted collection rates during the first nine months of 2023 that decreased forecasted net cash flows from our Loan portfolio by $149.3 million, or 1.7%. The $282.9 million decrease in forecasted net cash flows for the first nine months of 2024 was composed of an ordinary decrease in forecasted net cash flows of $135.7 million, or 1.4%, and an adjustment applied to our forecasting methodology during the second quarter of 2024, which upon implementation, reduced forecasted net cash flows by $147.2 million, or 1.4%. The $149.3 million decrease in forecasted net cash flows for the first nine months of 2023 was composed of an ordinary decrease in forecasted net cash flows of $104.8 million, or 1.2%, and an adjustment to our forecasting methodology, which upon implementation, reduced forecasted net cash flows by $44.5 million, or 0.5%.
•A decrease in forecasted profitability for Consumer Loans assigned in 2021 through 2024 as described above
•Growth in Consumer Loan assignment volume and the average balance of our Loan portfolio
Unit and dollar volumes grew 21.0% and 16.3%, respectively, as compared to the first nine months of 2023. The average balance of our Loan portfolio, which is our largest-ever, increased 13.5% as compared to the first nine months of 2023.
•An increase in the initial spread on Consumer Loan assignments
The initial spread increased to 22.0% compared to 21.2% on Consumer Loans assigned in the first nine months of 2023.
•An increase in our average cost of debt
Our average cost of debt increased from 5.3% to 7.2%, primarily due to the factors described above.
•A decrease in common shares outstanding due to stock repurchases as described above
•Loss on sale of building
We recognized a $23.7 million loss during the second quarter of 2024 related to the sale of one of our two office buildings. The building was sold to reduce excess office space and eliminate the associated annual operating costs of approximately $2.1 million.
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.
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We use a statistical model to estimate the expected collection rate for each Consumer Loan at the time of assignment. We continue to evaluate the expected collection rate 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 September 30, 2024, with the aggregated forecasts as of June 30, 2024, as of December 31, 2023, 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 | September 30, 2024 | June 30, 2024 | December 31, 2023 | Initial Forecast | June 30, 2024 | December 31, 2023 | Initial Forecast | |||||||||||||||||||||||||||||||||||||
| 2015 | 65.3 | % | 65.3 | % | 65.2 | % | 67.7 | % | 0.0 | % | 0.1 | % | -2.4 | % | ||||||||||||||||||||||||||||||
| 2016 | 63.9 | % | 63.9 | % | 63.8 | % | 65.4 | % | 0.0 | % | 0.1 | % | -1.5 | % | ||||||||||||||||||||||||||||||
| 2017 | 64.7 | % | 64.7 | % | 64.7 | % | 64.0 | % | 0.0 | % | 0.0 | % | 0.7 | % | ||||||||||||||||||||||||||||||
| 2018 | 65.5 | % | 65.5 | % | 65.5 | % | 63.6 | % | 0.0 | % | 0.0 | % | 1.9 | % | ||||||||||||||||||||||||||||||
| 2019 | 67.2 | % | 67.1 | % | 66.9 | % | 64.0 | % | 0.1 | % | 0.3 | % | 3.2 | % | ||||||||||||||||||||||||||||||
| 2020 | 67.6 | % | 67.7 | % | 67.6 | % | 63.4 | % | -0.1 | % | 0.0 | % | 4.2 | % | ||||||||||||||||||||||||||||||
| 2021 | 63.8 | % | 64.1 | % | 64.5 | % | 66.3 | % | -0.3 | % | -0.7 | % | -2.5 | % | ||||||||||||||||||||||||||||||
| 2022 | 60.6 | % | 61.1 | % | 62.7 | % | 67.5 | % | -0.5 | % | -2.1 | % | -6.9 | % | ||||||||||||||||||||||||||||||
| 2023 | 64.3 | % | 64.5 | % | 67.4 | % | 67.5 | % | -0.2 | % | -3.1 | % | -3.2 | % | ||||||||||||||||||||||||||||||
| 2024 (2) | 66.6 | % | 66.6 | % | — | 67.3 | % | 0.0 | % | — | -0.7 | % | ||||||||||||||||||||||||||||||||
(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.
(2)The forecasted collection rate for 2024 Consumer Loans as of September 30, 2024 includes both Consumer Loans that were in our portfolio as of June 30, 2024 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 | |||||||||||||||||||||||||||||||
| 2024 Consumer Loan Assignment Period | September 30, 2024 | June 30, 2024 | Initial Forecast | June 30, 2024 | Initial Forecast | |||||||||||||||||||||||||||
| January 1, 2024 through June 30, 2024 | 66.4 | % | 66.6 | % | 67.2 | % | -0.2 | % | -0.8 | % | ||||||||||||||||||||||
| July 1, 2024 through September 30, 2024 | 67.0 | % | — | 67.3 | % | — | -0.3 | % | ||||||||||||||||||||||||
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 2021 through 2023 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 September 30, 2024, forecasted collection rates declined for Consumer Loans assigned in 2021 through 2024 and were generally consistent with expectations at the start of the period for all other assignment years presented. For the nine months ended September 30, 2024, forecasted collection rates improved for Consumer Loans assigned in 2019, declined for Consumer Loans assigned in 2021 through 2024, 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 nine months ended September 30, 2024 and 2023 impacted forecasted net cash flows (forecasted collections less forecasted Dealer Holdback payments) as follows:
| (Dollars in millions) | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||||
| Decrease in Forecasted Net Cash Flows | 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||||
| Dealer loans | $ | (43.6) | $ | (40.3) | $ | (173.0) | $ | (89.3) | ||||||||||||||||||
| Purchased loans | (19.2) | (29.1) | (109.9) | (60.0) | ||||||||||||||||||||||
| Total | $ | (62.8) | $ | (69.4) | $ | (282.9) | $ | (149.3) | ||||||||||||||||||
| % change from forecast at beginning of period | -0.6 | % | -0.7 | % | -2.8 | % | -1.7 | % | ||||||||||||||||||
48
During the second quarter of 2024, we applied an adjustment to our methodology for forecasting the amount of future net cash flows from our Loan portfolio, which reduced the forecasted collection rates for Consumer Loans assigned in 2022 through 2024. Consumer Loans assigned in 2022 had continued to underperform our expectations for several quarters. More recently, Consumer Loans assigned in 2023 had also begun exhibiting similar trends of underperformance, although not as severe as Consumer Loans assigned in 2022. During the second quarter of 2024, we determined that we had sufficient Consumer Loan performance experience to estimate the magnitude by which we expected Consumer Loans assigned in 2022 through 2024 would likely underperform our historical collection rates on Consumer Loans with similar characteristics. Accordingly, we applied an adjustment to Consumer Loans assigned in 2022 through 2024 to reduce forecasted collection rates to what we believed the ultimate collection rates would be based on these trends. 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 this forecast adjustment during the second quarter of 2024 reduced forecasted net cash flows by $147.2 million, or 1.4%, and increased provision for credit losses by $127.5 million.
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. We had 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.
We have experienced increased levels of uncertainty associated with our estimate of the amount and timing of future net cash flows from our Loan portfolio since the beginning of 2020, with realized collections underperforming our expectations during the early stages of the COVID-19 pandemic, outperforming our expectations following the distribution of federal stimulus payments and enhanced unemployment benefits, and underperforming our expectations during the current economic environment. For the period from January 1, 2020 through September 30, 2024, the cumulative change to our forecast of future net cash flows from our Loan portfolio has been a decrease of $269.1 million, or 3.0%, as shown in the following table:
| (Dollars in millions) | Increase (Decrease) in Forecasted Net Cash Flows | |||||||||||||
| Three Months Ended | 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 | % | |||||||||||
| June 30, 2024 | (189.3) | -1.7 | % | |||||||||||
| September 30, 2024 | (62.8) | -0.6 | % | |||||||||||
| Total | $ | (269.1) | -3.0 | % | ||||||||||
49
The following table presents information on Consumer Loan assignments for each of the last 10 years:
| Average | Total Assignment Volume | |||||||||||||||||||||||||||||||
| Consumer Loan Assignment Year | Consumer Loan (1) | Advance (2) | Initial Loan Term (in months) | Unit Volume | Dollar Volume (2) (in millions) | |||||||||||||||||||||||||||
| 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)(4) | 26,564 | 12,018 | 61 | 307,215 | 3,692.1 | |||||||||||||||||||||||||||
(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 nine months ended September 30, 2024. Information in this table for each of the years prior to 2024 represents activity for all 12 months of that year.
(4)The averages for 2024 Consumer Loans include both Consumer Loans that were in our portfolio as of June 30, 2024 and Consumer Loans assigned during the most recent quarter. The following table provides averages for each of these segments:
| Average | ||||||||||||||||||||
| 2024 Consumer Loan Assignment Period | Consumer Loan | Advance | Initial Loan Term (in months) | |||||||||||||||||
| January 1, 2024 through June 30, 2024 | $ | 26,554 | $ | 12,033 | 61 | |||||||||||||||
| July 1, 2024 through September 30, 2024 | 26,586 | 11,985 | 61 | |||||||||||||||||
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 September 30, 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.
| Forecasted Collection % as of | Spread % as of | |||||||||||||||||||||||||||||||||||||
| Consumer Loan Assignment Year | September 30, 2024 | Initial Forecast | Advance % (1) | September 30, 2024 | Initial Forecast | % of Forecast Realized (2) | ||||||||||||||||||||||||||||||||
| 2015 | 65.3 | % | 67.7 | % | 44.5 | % | 20.8 | % | 23.2 | % | 99.7 | % | ||||||||||||||||||||||||||
| 2016 | 63.9 | % | 65.4 | % | 43.8 | % | 20.1 | % | 21.6 | % | 99.4 | % | ||||||||||||||||||||||||||
| 2017 | 64.7 | % | 64.0 | % | 43.2 | % | 21.5 | % | 20.8 | % | 99.1 | % | ||||||||||||||||||||||||||
| 2018 | 65.5 | % | 63.6 | % | 43.5 | % | 22.0 | % | 20.1 | % | 98.4 | % | ||||||||||||||||||||||||||
| 2019 | 67.2 | % | 64.0 | % | 44.0 | % | 23.2 | % | 20.0 | % | 96.1 | % | ||||||||||||||||||||||||||
| 2020 | 67.6 | % | 63.4 | % | 43.9 | % | 23.7 | % | 19.5 | % | 90.8 | % | ||||||||||||||||||||||||||
| 2021 | 63.8 | % | 66.3 | % | 46.0 | % | 17.8 | % | 20.3 | % | 80.8 | % | ||||||||||||||||||||||||||
| 2022 | 60.6 | % | 67.5 | % | 47.4 | % | 13.2 | % | 20.1 | % | 61.3 | % | ||||||||||||||||||||||||||
| 2023 | 64.3 | % | 67.5 | % | 46.2 | % | 18.1 | % | 21.3 | % | 36.8 | % | ||||||||||||||||||||||||||
| 2024 (3) | 66.6 | % | 67.3 | % | 45.3 | % | 21.3 | % | 22.0 | % | 10.7 | % | ||||||||||||||||||||||||||
50
(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 2024 Consumer Loans as of September 30, 2024 include both Consumer Loans that were in our portfolio as of June 30, 2024 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 | |||||||||||||||||||||||||||||||
| 2024 Consumer Loan Assignment Period | September 30, 2024 | Initial Forecast | Advance % | September 30, 2024 | Initial Forecast | |||||||||||||||||||||||||||
| January 1, 2024 through June 30, 2024 | 66.4 | % | 67.2 | % | 45.2 | % | 21.2 | % | 22.0 | % | ||||||||||||||||||||||
| July 1, 2024 through September 30, 2024 | 67.0 | % | 67.3 | % | 45.4 | % | 21.6 | % | 21.9 | % | ||||||||||||||||||||||
The risk of a material change in our forecasted collection rate declines as the Consumer Loans age. For 2020 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 September 30, 2024 and the advance rate ranges from 13.2% to 23.7%, 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 September 30, 2024 was primarily a result of Consumer Loan performance, as the performance of 2023 Consumer Loans has been lower than our initial estimates by a greater margin than 2024 Consumer Loans. Additionally, 2024 Consumer Loans had a higher initial spread, which was primarily due to a decrease in the advance rate.
The following table compares our forecast of aggregate Consumer Loan collection rates as of September 30, 2024 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 | September 30, 2024 | Initial Forecast | Variance | September 30, 2024 | Initial Forecast | Variance | ||||||||||||||||||||||||||||||||
| 2015 | 64.6 | % | 67.5 | % | -2.9 | % | 69.0 | % | 68.5 | % | 0.5 | % | ||||||||||||||||||||||||||
| 2016 | 63.1 | % | 65.1 | % | -2.0 | % | 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 | 66.8 | % | 63.9 | % | 2.9 | % | 67.9 | % | 64.2 | % | 3.7 | % | ||||||||||||||||||||||||||
| 2020 | 67.5 | % | 63.3 | % | 4.2 | % | 67.9 | % | 63.6 | % | 4.3 | % | ||||||||||||||||||||||||||
| 2021 | 63.5 | % | 66.3 | % | -2.8 | % | 64.3 | % | 66.3 | % | -2.0 | % | ||||||||||||||||||||||||||
| 2022 | 59.8 | % | 67.3 | % | -7.5 | % | 62.4 | % | 68.0 | % | -5.6 | % | ||||||||||||||||||||||||||
| 2023 | 63.1 | % | 66.8 | % | -3.7 | % | 67.6 | % | 69.4 | % | -1.8 | % | ||||||||||||||||||||||||||
| 2024 | 65.5 | % | 66.3 | % | -0.8 | % | 70.5 | % | 70.7 | % | -0.2 | % | ||||||||||||||||||||||||||
(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.
51
The following table presents aggregate forecasted Consumer Loan collection rates, advance rates, and spreads (the forecasted collection rate less the advance rate) as of September 30, 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).
| Dealer Loans | Purchased Loans | |||||||||||||||||||||||||||||||||||||
| Consumer Loan Assignment Year | Forecasted Collection % (1) | Advance % (1)(2) | Spread % | Forecasted Collection % (1) | Advance % (1)(2) | Spread % | ||||||||||||||||||||||||||||||||
| 2015 | 64.6 | % | 43.4 | % | 21.2 | % | 69.0 | % | 50.2 | % | 18.8 | % | ||||||||||||||||||||||||||
| 2016 | 63.1 | % | 42.1 | % | 21.0 | % | 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 | 66.8 | % | 43.1 | % | 23.7 | % | 67.9 | % | 45.6 | % | 22.3 | % | ||||||||||||||||||||||||||
| 2020 | 67.5 | % | 43.0 | % | 24.5 | % | 67.9 | % | 45.5 | % | 22.4 | % | ||||||||||||||||||||||||||
| 2021 | 63.5 | % | 45.1 | % | 18.4 | % | 64.3 | % | 47.7 | % | 16.6 | % | ||||||||||||||||||||||||||
| 2022 | 59.8 | % | 46.4 | % | 13.4 | % | 62.4 | % | 50.1 | % | 12.3 | % | ||||||||||||||||||||||||||
| 2023 | 63.1 | % | 44.8 | % | 18.3 | % | 67.6 | % | 49.8 | % | 17.8 | % | ||||||||||||||||||||||||||
| 2024 | 65.5 | % | 44.3 | % | 21.2 | % | 70.5 | % | 49.0 | % | 21.5 | % | ||||||||||||||||||||||||||
(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 September 30, 2024 on 2024 Dealer Loans was 21.2%, as compared to a spread of 18.3% 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 by a greater margin than 2024 Dealer Loans.
The spread as of September 30, 2024 on 2024 Purchased Loans was 21.5%, as compared to a spread of 17.8% on 2023 Purchased Loans. The increase was primarily a result of a higher initial spread on 2024 Purchased Loans, due to a higher initial forecast and lower advance rate. Additionally, the performance of 2023 Purchased Loans has been lower than our initial estimates by a greater margin than 2024 Purchased Loans.
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 3.8 to 1 as of September 30, 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.
52
Consumer Loan Volume
The following table summarizes changes in Consumer Loan assignment volume in each of the last seven 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, 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 | % | ||||||||||
| June 30, 2024 | 20.9 | % | 16.3 | % | ||||||||||
| September 30, 2024 | 17.7 | % | 12.2 | % | ||||||||||
(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 17.7% and 12.2%, respectively, during the third quarter of 2024 as the number of active Dealers grew 8.8% and the average unit volume per active Dealer increased 8.4%. Dollar volume increased less than unit volume during the third quarter of 2024 due to a decrease in the average advance paid, due to decreases in the average size of Consumer Loans assigned and the average advance rate. Unit volume for the 28-day period ended October 28, 2024 grew 4.6% compared to the same period in 2023.
53
The following table summarizes the changes in Consumer Loan unit volume and active Dealers:
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
| 2024 | 2023 | % Change | 2024 | 2023 | % Change | ||||||||||||||||||||||||||||||
| Consumer Loan unit volume | 95,670 | 81,299 | 17.7 | % | 307,215 | 253,847 | 21.0 | % | |||||||||||||||||||||||||||
| Active Dealers (1) | 10,678 | 9,818 | 8.8 | % | 14,326 | 13,008 | 10.1 | % | |||||||||||||||||||||||||||
| Average volume per active Dealer | 9.0 | 8.3 | 8.4 | % | 21.4 | 19.5 | 9.7 | % | |||||||||||||||||||||||||||
Consumer Loan unit volume from Dealers active both periods | 74,108 | 67,930 | 9.1 | % | 262,564 | 228,157 | 15.1 | % | |||||||||||||||||||||||||||
| Dealers active both periods | 6,595 | 6,595 | — | 9,604 | 9,604 | — | |||||||||||||||||||||||||||||
Average volume per Dealer active both periods | 11.2 | 10.3 | 9.1 | % | 27.3 | 23.8 | 15.1 | % | |||||||||||||||||||||||||||
Consumer Loan unit volume from Dealers not active both periods | 21,562 | 13,369 | 61.3 | % | 44,651 | 25,690 | 73.8 | % | |||||||||||||||||||||||||||
Dealers not active both periods | 4,083 | 3,223 | 26.7 | % | 4,722 | 3,404 | 38.7 | % | |||||||||||||||||||||||||||
Average volume per Dealer not active both periods | 5.3 | 4.1 | 29.3 | % | 9.5 | 7.5 | 26.7 | % | |||||||||||||||||||||||||||
(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 September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
| 2024 | 2023 | % Change | 2024 | 2023 | % Change | ||||||||||||||||||||||||||||||
Consumer Loan unit volume from new active Dealers | 3,447 | 3,926 | -12.2 | % | 29,441 | 29,005 | 1.5 | % | |||||||||||||||||||||||||||
| New active Dealers (1) | 1,038 | 983 | 5.6 | % | 3,428 | 3,095 | 10.8 | % | |||||||||||||||||||||||||||
Average volume per new active Dealer | 3.3 | 4.0 | -17.5 | % | 8.6 | 9.4 | -8.5 | % | |||||||||||||||||||||||||||
Attrition (2) | -16.4 | % | -17.2 | % | -10.1 | % | -8.9 | % | |||||||||||||||||||||||||||
(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 seven quarters:
| Unit Volume | Dollar Volume (1) | |||||||||||||||||||||||||
| Three Months Ended | Dealer Loans | Purchased Loans | 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 | % | ||||||||||||||||||
| June 30, 2024 | 78.5 | % | 21.5 | % | 77.3 | % | 22.7 | % | ||||||||||||||||||
| September 30, 2024 | 79.5 | % | 20.5 | % | 78.4 | % | 21.6 | % | ||||||||||||||||||
(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 September 30, 2024 and December 31, 2023, the net Dealer Loans receivable balance was 71.6% and 67.7%, respectively, of the total net Loans receivable balance.
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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, including our results of operations, financial condition, and financial leverage. 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.
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Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 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) | For the Three Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | $ Change | % Change | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Finance charges | $ | 507.6 | $ | 441.7 | $ | 65.9 | 14.9 | % | |||||||||||||||
| Premiums earned | 25.1 | 20.8 | 4.3 | 20.7 | % | ||||||||||||||||||
| Other income | 17.6 | 16.1 | 1.5 | 9.3 | % | ||||||||||||||||||
| Total revenue | 550.3 | 478.6 | 71.7 | 15.0 | % | ||||||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||
| Salaries and wages | 77.3 | 66.7 | 10.6 | 15.9 | % | ||||||||||||||||||
| General and administrative | 29.0 | 21.3 | 7.7 | 36.2 | % | ||||||||||||||||||
| Sales and marketing | 23.1 | 22.5 | 0.6 | 2.7 | % | ||||||||||||||||||
| Total operating expenses | 129.4 | 110.5 | 18.9 | 17.1 | % | ||||||||||||||||||
| Provision for credit losses on forecast changes | 105.9 | 106.3 | (0.4) | -0.4 | % | ||||||||||||||||||
| Provision for credit losses on new Consumer Loan assignments | 78.8 | 78.3 | 0.5 | 0.6 | % | ||||||||||||||||||
| Total provision for credit losses | 184.7 | 184.6 | 0.1 | 0.1 | % | ||||||||||||||||||
| Interest | 111.2 | 70.5 | 40.7 | 57.7 | % | ||||||||||||||||||
| Provision for claims | 18.5 | 16.5 | 2.0 | 12.1 | % | ||||||||||||||||||
| Total costs and expenses | 443.8 | 382.1 | 61.7 | 16.1 | % | ||||||||||||||||||
| Income before provision for income taxes | 106.5 | 96.5 | 10.0 | 10.4 | % | ||||||||||||||||||
| Provision for income taxes | 27.7 | 25.7 | 2.0 | 7.8 | % | ||||||||||||||||||
| Net income | $ | 78.8 | $ | 70.8 | $ | 8.0 | 11.3 | % | |||||||||||||||
| Net income per share: | |||||||||||||||||||||||
| Basic | $ | 6.42 | $ | 5.47 | $ | 0.95 | 17.4 | % | |||||||||||||||
| Diluted | $ | 6.35 | $ | 5.43 | $ | 0.92 | 16.9 | % | |||||||||||||||
| Weighted average shares outstanding: | |||||||||||||||||||||||
| Basic | 12,274,685 | 12,933,377 | (658,692) | -5.1 | % | ||||||||||||||||||
| Diluted | 12,415,143 | 13,039,638 | (624,495) | -4.8 | % | ||||||||||||||||||
Finance Charges. The increase of $65.9 million, or 14.9%, was primarily due to an increase in the average net Loans receivable balance, as follows:
| (Dollars in millions) | For the Three Months Ended September 30, | ||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||
| Average net Loans receivable balance | $ | 7,690.9 | $ | 6,690.8 | $ | 1,000.1 | |||||||||||
| Average yield on our Loan portfolio | 26.4 | % | 26.4 | % | 0.0 | % | |||||||||||
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The following table summarizes the impact each component had on the overall increase in finance charges for the three months ended September 30, 2024:
| (In millions) | Year over Year Change | ||||
| Impact on finance charges: | For the Three Months Ended September 30, 2024 | ||||
| Due to an increase in the average net Loans receivable balance | $ | 66.0 | |||
| Due to a decrease in the average yield | (0.1) | ||||
| Total increase in finance charges | $ | 65.9 | |||
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 $4.3 million, or 20.7%, 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 $18.9 million, or 17.1%, was primarily due to:
•An increase in salaries and wages expense of $10.6 million, or 15.9%, primarily due to increases in (i) the number of team members as we are investing in our business with the goal of increasing the speed at which we enhance our product for Dealers and consumers and (ii) fringe benefits, primarily due to higher medical claims.
•An increase in general and administrative expenses of $7.7 million, or 36.2%, primarily due to an increase in legal expenses.
Provision for Credit Losses. Provision for credit losses remained relatively consistent, increasing by $0.1 million, or 0.1%.
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 Three Months Ended September 30, | ||||||||||||||||
| Provision for Credit Losses | 2024 | 2023 | Change | ||||||||||||||
| Forecast changes | $ | 105.9 | $ | 106.3 | $ | (0.4) | |||||||||||
| New Consumer Loan assignments | 78.8 | 78.3 | 0.5 | ||||||||||||||
| Total | $ | 184.7 | $ | 184.6 | $ | 0.1 | |||||||||||
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.
Interest. The increase in interest expense of $40.7 million, or 57.7%, was due to:
•An increase in our average cost of debt, which increased interest expense by $22.6 million, primarily as 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 our average outstanding debt balance, which increased interest expense by $18.1 million, primarily due to borrowings used to fund the growth of our Loan portfolio and stock repurchases.
The following table presents the change in interest expense, average outstanding debt balance, and average cost of debt for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023:
| (Dollars in millions) | For the Three Months Ended September 30, | ||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||
| Interest expense | $ | 111.2 | $ | 70.5 | $ | 40.7 | |||||||||||
| Average outstanding debt balance | 6,071.1 | 4,831.4 | 1,239.7 | ||||||||||||||
| Average cost of debt | 7.3 | % | 5.8 | % | 1.5 | % | |||||||||||
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Provision for Income Taxes. For the three months ended September 30, 2024, the effective income tax rate decreased to 26.0% from 26.6% for the same period in 2023. The decrease was primarily due to the settlement of an uncertain tax position for state income taxes during the third quarter of 2024. 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.
Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 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) | For the Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | $ Change | % Change | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Finance charges | $ | 1,474.5 | $ | 1,303.8 | $ | 170.7 | 13.1 | % | |||||||||||||||
| Premiums earned | 71.3 | 58.0 | 13.3 | 22.9 | % | ||||||||||||||||||
| Other income | 50.7 | 48.5 | 2.2 | 4.5 | % | ||||||||||||||||||
| Total revenue | 1,596.5 | 1,410.3 | 186.2 | 13.2 | % | ||||||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||
| Salaries and wages | 231.6 | 214.1 | 17.5 | 8.2 | % | ||||||||||||||||||
| General and administrative | 75.9 | 59.8 | 16.1 | 26.9 | % | ||||||||||||||||||
| Sales and marketing | 72.4 | 70.9 | 1.5 | 2.1 | % | ||||||||||||||||||
| Total operating expenses | 379.9 | 344.8 | 35.1 | 10.2 | % | ||||||||||||||||||
| Provision for credit losses on forecast changes | 430.9 | 319.4 | 111.5 | 34.9 | % | ||||||||||||||||||
| Provision for credit losses on new Consumer Loan assignments | 260.4 | 253.1 | 7.3 | 2.9 | % | ||||||||||||||||||
| Total provision for credit losses | 691.3 | 572.5 | 118.8 | 20.8 | % | ||||||||||||||||||
| Interest | 308.2 | 187.7 | 120.5 | 64.2 | % | ||||||||||||||||||
| Provision for claims | 55.8 | 54.1 | 1.7 | 3.1 | % | ||||||||||||||||||
| Loss on sale of building | 23.7 | — | 23.7 | — | % | ||||||||||||||||||
| Total costs and expenses | 1,458.9 | 1,159.1 | 299.8 | 25.9 | % | ||||||||||||||||||
| Income before provision for income taxes | 137.6 | 251.2 | (113.6) | -45.2 | % | ||||||||||||||||||
| Provision for income taxes | 41.6 | 58.7 | (17.1) | -29.1 | % | ||||||||||||||||||
| Net income | $ | 96.0 | $ | 192.5 | $ | (96.5) | -50.1 | % | |||||||||||||||
| Net income per share: | |||||||||||||||||||||||
| Basic | $ | 7.78 | $ | 14.79 | $ | (7.01) | -47.4 | % | |||||||||||||||
| Diluted | $ | 7.68 | $ | 14.73 | $ | (7.05) | -47.9 | % | |||||||||||||||
| Weighted average shares outstanding: | |||||||||||||||||||||||
| Basic | 12,345,739 | 13,013,344 | (667,605) | -5.1 | % | ||||||||||||||||||
| Diluted | 12,494,011 | 13,068,998 | (574,987) | -4.4 | % | ||||||||||||||||||
Finance Charges. The increase of $170.7 million, or 13.1%, was primarily a result of an increase in the average net Loans receivable balance, as follows:
| (Dollars in millions) | For the Nine Months Ended September 30, | ||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||
| Average net Loans receivable balance | $ | 7,430.4 | $ | 6,547.8 | $ | 882.6 | |||||||||||
| Average yield on our Loan portfolio | 26.5 | % | 26.5 | % | 0.0 | % | |||||||||||
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The following table summarizes the impact each component had on the overall increase in finance charges for the nine months ended September 30, 2024:
| (In millions) | Year over Year Change | ||||
| Impact on finance charges: | For the Nine Months Ended September 30, 2024 | ||||
| Due to an increase in the average net Loans receivable balance | $ | 175.7 | |||
| Due to a decrease in the average yield | (5.0) | ||||
| Total increase in finance charges | $ | 170.7 | |||
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 $13.3 million, or 22.9%, 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 $35.1 million, or 10.2%, was primarily due to:
•An increase in salaries and wages expense of $17.5 million, or 8.2%, primarily due to increases in (i) the number of team members as we are investing in our business with the goal of increasing the speed at which we enhance our product for Dealers and consumers and (ii) fringe benefits, primarily due to higher medical claims.
•An increase in general and administrative expense of $16.1 million, or 26.9%, primarily due to increases in legal and technology systems expenses.
Provision for Credit Losses. The increase of $118.8 million, or 20.8%, was primarily due to an increase in provision for credit losses on forecast changes.
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 Nine Months Ended September 30, | ||||||||||||||||
| Provision for Credit Losses | 2024 | 2023 | Change | ||||||||||||||
| Forecast changes | $ | 430.9 | $ | 319.4 | $ | 111.5 | |||||||||||
| New Consumer Loan assignments | 260.4 | 253.1 | 7.3 | ||||||||||||||
| Total | $ | 691.3 | $ | 572.5 | $ | 118.8 | |||||||||||
The increase in provision for credit losses related to forecast changes was primarily due to a greater decline in Consumer Loan performance during the first nine months of 2024 compared to the first nine months of 2023.
During the first nine months of 2024, we decreased our estimate of future net cash flows by $282.9 million, or 2.8%, 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. The $282.9 million decrease in forecasted net cash flows for the first nine months of 2024 was composed of an ordinary decrease in forecasted net cash flows of $135.7 million, or 1.4%, and an adjustment applied to our forecasting methodology during the second quarter of 2024, which upon implementation, reduced forecasted net cash flows by $147.2 million, or 1.4%, and increased our provision for credit losses by $127.5 million. Consumer Loans assigned in 2022 had continued to underperform our expectations for several quarters. More recently, Consumer Loans assigned in 2023 had also begun exhibiting similar trends of underperformance, although not as severe as Consumer Loans assigned in 2022. During the second quarter of 2024, we determined that we had sufficient Consumer Loan performance experience to estimate the magnitude by which we expected Consumer Loans assigned in 2022 through 2024 would likely underperform our historical collection rates on Consumer Loans with similar characteristics. Accordingly, we applied an adjustment to Consumer Loans assigned in 2022 through 2024 to reduce forecasted collection rates to what we believed the ultimate collection rates would be based on these trends.
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During the first nine months of 2023, we decreased our estimate of future net cash flows by $149.3 million, or 1.7%, to reflect a decline in Consumer Loan prepayments to below-average levels. The $149.3 million decrease in forecasted net cash flows for the first nine months of 2023 was composed of an ordinary decrease in forecasted net cash flows of $104.8 million, or 1.2%, and an adjustment to our forecasting methodology during the second quarter of 2023, which upon implementation, decreased our estimate of future net cash flows by $44.5 million, or 0.5%, and increased our provision for credit losses by $71.3 million. We adjusted our methodology for forecasting the amount and timing of future net cash flows from our Loan portfolio through the utilization of more recent Consumer Loan performance and Consumer Loan prepayment data.
For additional information, see Note 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 increase in provision for credit losses related to new Consumer Loan assignments was due to a 21.0% increase in Consumer Loan assignment unit volume, partially offset by a 15.0% decrease in the average provision per Consumer Loan assignment. The decrease in the average provision per Consumer Loan assignment was due to a lower percentage of Purchased Loans in the mix of Consumer Loan assignments received during 2024, and a decrease in the average advance rates under our Portfolio and Purchase Programs for 2024 Consumer Loans.
Interest. The increase in interest expense of $120.5 million, or 64.2%, was due to:
•An increase in our average cost of debt, which increased interest expense by $80.2 million, primarily as 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 our average outstanding debt balance, which increased interest expense by $40.3 million, primarily due to borrowings used to fund the growth of our Loan portfolio and stock repurchases.
The following table presents the change in interest expense, average outstanding debt balance, and average cost of debt for the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023:
| (Dollars in millions) | For the Nine Months Ended September 30, | ||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||
| Interest expense | $ | 308.2 | $ | 187.7 | $ | 120.5 | |||||||||||
| Average outstanding debt balance | 5,732.1 | 4,718.7 | 1,013.4 | ||||||||||||||
| Average cost of debt | 7.2 | % | 5.3 | % | 1.9 | % | |||||||||||
Loss on Sale of Building. For the nine months ended September 30, 2024, we recognized a loss on the sale of a building of $23.7 million. For additional information, see Note 7 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.
Provision for Income Taxes. For the nine months ended September 30, 2024, our effective income tax rate increased to 30.2% from 23.4% for the nine months ended September 30, 2023. The increase was primarily due to:
•An increase in the impact of state and local income taxes on our effective income tax rate, primarily due to an adjustment to an uncertain tax position estimate during the second quarter of 2024 and changes in state tax laws that were enacted during 2024.
•A decrease in the impact of excess tax benefits on our effective income tax rate, primarily due to the timing of long-term stock award grants.
•An increase in the impact of non-deductible executive compensation expense on our effective income tax rate, primarily due to a decrease in pre-tax income.
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,
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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 the vast majority of our team members now work remotely, we had significant excess space in the two office buildings that we owned in Southfield, Michigan. During the second quarter of 2024, we sold the larger building for net sales proceeds of $3.2 million, and recognized a loss on sale of the building of $23.7 million. The loss on sale of the building represented the amount by which the $26.9 million carrying value of the building and its improvements, the related land and land improvements, and office furniture and equipment exceeded the net sales proceeds of $3.2 million.
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 September 30, 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 2021-1 financing and extended the date on which the financing will cease to revolve 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.
On June 17, 2024, we extended the maturity of our revolving secured line of credit facility from June 22, 2026 to June 22, 2027. The interest rate on borrowings under the facility has changed from the Bloomberg Short-Term Bank Yield Index rate plus 187.5 basis points to SOFR plus 197.5 basis points.
On June 20, 2024, we completed a $550.0 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 6.5% (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.
On June 21, 2024, we increased the financing amount on the Term ABS 2022-2 financing from $200.0 million to $300.0 million and extended the date on which the financing will cease to revolve from December 15, 2025 to June 15, 2027.
On September 19, 2024, we increased the financing amount on Warehouse Facility II from $400.0 million to $500.0 million and extended the date on which the facility will cease to revolve from April 30, 2026 to September 20, 2027. The interest rate on borrowings under the facility has been decreased from SOFR plus 230 basis points to SOFR plus 185 basis points.
On September 19, 2024, we extended the date on which the $500.0 million Term ABS 2019-2 financing will cease to revolve from August 15, 2025 to September 15, 2026 and increased the interest rate under the financing from 5.15% to 5.43%.
On September 26, 2024, we completed a $600.0 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 5.2% (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 $159.7 million as of September 30, 2024 and $13.2 million as of December 31, 2023. As of September 30, 2024 and December 31, 2023, we had $1,684.0 million and $1,505.8 million, respectively, in unused and
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available lines of credit. Our total balance sheet indebtedness increased to $6,248.9 million as of September 30, 2024 from $5,067.5 million as of December 31, 2023, primarily due to the growth in new Consumer Loan assignments and stock repurchases.
A summary of our scheduled principal debt maturities as of September 30, 2024 is as follows:
| (In millions) | ||||||||
| Year | Scheduled Principal Debt Maturities (1) | |||||||
| Remainder of 2024 | $ | 208.2 | ||||||
| 2025 | 1,344.8 | |||||||
| 2026 | 2,539.0 | |||||||
| 2027 | 1,528.0 | |||||||
| 2028 | 670.6 | |||||||
| Over five years | — | |||||||
| Total | $ | 6,290.6 | ||||||
(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, except as described below.
During the second quarter of 2024, we applied an adjustment to our methodology for forecasting the amount of future net cash flows from our Loan portfolio, which reduced the forecasted collection rates for Consumer Loans assigned in 2022 through 2024. Consumer Loans assigned in 2022 had continued to underperform our expectations for several quarters. More recently, Consumer Loans assigned in 2023 had also begun exhibiting similar trends of underperformance, although not as severe as Consumer Loans assigned in 2022. During the second quarter of 2024, we determined that we had sufficient Consumer Loan performance experience to estimate the magnitude by which we expected Consumer Loans assigned in 2022 through 2024 would likely underperform our historical collection rates on Consumer Loans with similar characteristics. Accordingly, we applied an adjustment to Consumer Loans assigned in 2022 through 2024 to reduce forecasted collection rates to what we believed the ultimate collection rates would be based on these trends. 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 this forecast adjustment during the second quarter of 2024 reduced forecasted net cash flows by $147.2 million, or 1.4%, and increased provision for credit losses by $127.5 million.
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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.
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•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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
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.
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 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.
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PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 the 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 or they may file individual arbitration demands for which arbitration providers may request separate filing fees. An adverse ultimate disposition in any action to which we are a party or otherwise subject, or the requirement to pay filing fees for a large number of individual arbitration demands, 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 16 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.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Stock Repurchases
The following table summarizes stock repurchases for the three months ended September 30, 2024:
ISSUER PURCHASES OF EQUITY SECURITIES
| Period | Total Number of Shares Purchased | Average Price Paid per Share (1) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (2) | ||||||||||||||||||||||
| July 1 to July 31, 2024 | 30 | (3) | $ | 606.95 | — | 1,346,570 | ||||||||||||||||||||
| August 1 to August 31, 2024 | 34 | (3) | 444.20 | — | 1,346,570 | |||||||||||||||||||||
| September 1 to September 30, 2024 | 22 | (3) | 450.89 | — | 1,346,570 | |||||||||||||||||||||
| Total | 86 | $ | 502.59 | — | ||||||||||||||||||||||
(1) Average price paid per share excludes excise tax. As of January 1, 2023, our share repurchases in excess of issuances are subject to a 1% excise tax enacted by the Inflation Reduction Act. Any excise tax incurred is recognized as part of the cost basis of the shares acquired in the Consolidated Statements of Shareholders’ Equity.
(2) On August 21, 2023, our board of directors authorized the repurchase by us from time to time of up to two million shares of our common stock (the "August 2023 Authorization"). The August 2023 Authorization, which was announced on August 24, 2023, does not have a specified expiration date. Repurchases under the August 2023 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.
(3) Consists of shares of common stock released to us by team members as payment of tax withholdings upon the settlement of restricted stock units in shares of common stock and the vesting of restricted stock units.
ITEM 5. OTHER INFORMATION
During the quarter ended September 30, 2024, 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 terminated
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ITEM 6. EXHIBITS
| Exhibit No. | Description | ||||
| Thirteenth Amendment to Sixth Amended and Restated Credit Agreement, dated as of July 26, 2024, 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 4.153 to the Company's Current Report on Form 8-K filed July 31, 2024). | |||||
| Consent, dated July 26, 2024, under the Loan and Security Agreement, dated as of November 30, 2023, among the Company, Credit Acceptance Funding LLC 2023-A, the lenders from time to time party thereto, Wells Fargo Bank, National Association, and Computershare Trust Company, N.A. (incorporated by reference to Exhibit 4.154 to the Company's Current Report on Form 8-K filed July 31, 2024). | |||||
| Amendment No. 2 to the Seventh Amended and Restated Loan and Security Agreement, dated as of July 26, 2024, among CAC Warehouse Funding LLC II, the Company, Wells Fargo Bank, National Association, and Computershare Trust Company, N.A. (incorporated by reference to Exhibit 4.155 to the Company's Current Report on Form 8-K filed July 31, 2024). | |||||
| Amendment No. 3 to Loan and Security Agreement, dated as of September 19, 2024, among the Company, Credit Acceptance Funding LLC 2019-2, Computershare Trust Company, N.A., and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.156 to the Company's Current Report on Form 8-K filed September 24, 2024). | |||||
| Amendment No. 3 to the Seventh Amended and Restated Loan and Security Agreement, dated as of September 19, 2024, among CAC Warehouse Funding LLC II, the Company, Wells Fargo Bank, National Association, and Computershare Trust Company, N.A.(incorporated by reference to Exhibit 4.157 to the Company's Current Report on Form 8-K filed September 24, 2024). | |||||
| Indenture, dated as of September 26, 2024, between Credit Acceptance Auto Loan Trust 2024-3 and Computershare Trust Company, N.A. (incorporated by reference to Exhibit 4.158 to the Company's Current Report on Form 8-K filed October 2, 2024). | |||||
| Backup Servicing Agreement, dated as of September 26, 2024, among the Company, Credit Acceptance Funding LLC 2024-3, Credit Acceptance Auto Loan Trust 2024-3, and Computershare Trust Company, N.A. (incorporated by reference to Exhibit 4.159 to the Company's Current Report on Form 8-K filed October 2, 2024). | |||||
| Amended and Restated Intercreditor Agreement, dated September 26, 2024, among the Company, CAC Warehouse Funding LLC II, CAC Warehouse Funding LLC IV, CAC Warehouse Funding LLC V, CAC Warehouse Funding LLC VI, CAC Warehouse Funding LLC VIII, Credit Acceptance Funding LLC 2024-3, Credit Acceptance Funding LLC 2024-2, Credit Acceptance Funding LLC 2024-1,Credit Acceptance Funding LLC 2024-A, Credit Acceptance Funding LLC 2023-5, Credit Acceptance Funding LLC 2023-A, Credit Acceptance Funding LLC 2023-3, Credit Acceptance Funding LLC 2023-2, Credit Acceptance Funding LLC 2023-1, Credit Acceptance Funding LLC 2022-3, Credit Acceptance Funding LLC 2022-2, Credit Acceptance Funding LLC 2022-1, Credit Acceptance Funding LLC 2021-4, Credit Acceptance Funding LLC 2021-3, Credit Acceptance Funding LLC 2021-1, Credit Acceptance Funding LLC 2019-2, Credit Acceptance Auto Loan Trust 2024-3, Credit Acceptance Auto Loan Trust 2024-2, Credit Acceptance Auto Loan Trust 2024-1, Credit Acceptance Auto Loan Trust 2024-A, Credit Acceptance Auto Loan Trust 2023-5, Credit Acceptance Auto Loan Trust 2023-3, Credit Acceptance Auto Loan Trust 2023-2, Credit Acceptance Auto Loan Trust 2023-1, Credit Acceptance Auto Loan Trust 2022-3, Credit Acceptance Auto Loan Trust 2022-1, Credit Acceptance Auto Loan Trust 2021-4, Credit Acceptance Auto Loan Trust 2021-3, Computershare Trust Company, N.A., Bank of Montreal, Fifth Third Bank, National Association, Flagstar Bank, National Association, Citizens Bank, N.A., and Comerica Bank (incorporated by reference to Exhibit 4.160 to the Company's Current Report on Form 8-K filed October 2, 2024). | |||||
| Sale and Contribution Agreement, dated as of September 26, 2024, between the Company and Credit Acceptance Funding LLC 2024-3 (incorporated by reference to Exhibit 4.161 to the Company's Current Report on Form 8-K filed October 2, 2024). | |||||
| Amended and Restated Trust Agreement, dated as of September 26, 2024, among Credit Acceptance Funding LLC 2024-3, each of the initial members of the Board of Trustees of the Trust, and Computershare Delaware Trust Company (incorporated by reference to Exhibit 4.162 to the Company's Current Report on Form 8-K filed October 2, 2024). | |||||
| Sale and Servicing Agreement, dated as of September 26, 2024, among the Company, Credit Acceptance Auto Loan Trust 2024-3, Credit Acceptance Funding LLC 2024-3, and Computershare Trust Company, N.A. (incorporated by reference to Exhibit 4.163 to the Company's Current Report on Form 8-K filed October 2, 2024). | |||||
| Sixth Amendment to Loan and Security Agreement, dated as of August 1, 2024, among the Company, CAC Warehouse Funding LLC VI, and Flagstar Bank, N.A. | |||||
| Amendment, effective September 19, 2024, to the Credit Acceptance Corporation Amended and Restated Incentive Compensation Plan. | |||||
| Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||||
| Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||||
| Certification of principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||||
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| Certification of principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||||
| 101(SCH) | Inline XBRL Taxonomy Extension Schema Document. | ||||
| 101(CAL) | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | ||||
| 101(DEF) | Inline XBRL Taxonomy Extension Definition Linkbase Document. | ||||
| 101(LAB) | Inline XBRL Taxonomy Extension Label Linkbase Document. | ||||
| 101(PRE) | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | ||||
| 104 | Cover Page Interactive Data File (included in the Exhibit 101 Inline XBRL Document Set). | ||||
| * | Management contract or compensatory plan or arrangement. | ||||
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SIGNATURES
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.
| CREDIT ACCEPTANCE CORPORATION | |||||||||||
| (Registrant) | |||||||||||
| By: | /s/ Jay D. Martin | ||||||||||
| Jay D. Martin | |||||||||||
| Chief Financial Officer | |||||||||||
| (Principal Financial Officer) | |||||||||||
| Date: | October 30, 2024 | ||||||||||
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