What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-02-10 compared with 2022-02-11 · 202 added, 234 removed, 1596 unchanged (21% of the section changed)

28 unchanged sentences

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Credit Losses, Provision for Credit Losses and Finance Charge Revenue

4 unchanged sentences

Dealer Loans and Purchased Loans, collectively referred to as “Loans”, are presented as Loans receivable in the consolidated balance sheets.

As described in Note 2 and Note 5 to the financial statements, on January 1, 2020 (the “Adoption Date”), the Company adopted Financial Accounting Standards Board Accounting Standard Codification (“ASC”) 326, Financial Instruments, which is also known as the current expected credit loss model (“CECL”).

As described further in note 2 and note 5 to the financial statements, on January 1, 2020 (the “Adoption Date”), the Company adopted Financial Accounting Standards Board Accounting Standard Codification (“ASC”) 326, Financial Instruments, which is also known as the current expected credit loss model (“CECL”).

The Loans outstanding at December 31, 2019 qualified for transition relief and were accounted for as purchased financial assets with credit deterioration (“PCD Method”).

7 unchanged sentences

The adjustment to the allowance for credit losses is recognized as either a provision for credit losses or a reversal of provision for credit losses in the consolidated statements of income.

During the first quarter of 2020, the Company evaluated the impact of the COVID-19 pandemic on its Loans based on, among other things, prior experience with economic downturns in the United States.

An adjustment was made based on management’s best estimate of the impact on the expected future net cash flows and ultimately resulted in an increase to the provision for credit losses and the allowance for credit losses.

The Company re-assessed this estimate throughout each period in 2021 and continued to apply a reduction to the expected future cash flows based on their evaluation.

During the first quarter of 2022, the Company enhanced their methodology for forecasting the amount and timing of future net cash flows through the utilization of more recent data and new forecast variables.

As a result, the Company removed the COVID-19 adjustment that was included in their estimate of future net cash flows during 2020 and 2021.

For Loans accounted for under the PCD Method, finance charge revenue is computed using the effective interest rate that was calculated on the Adoption Date based on expected future net cash flows.

1 unchanged sentence

We identified the allowance for credit losses, provision for credit losses and finance change revenue, which are recorded based on subjective models, as a critical audit matter.

The allowance for credit losses as of December 31, 2021 was $3,013.5 million and the provision for credit losses was $8.4 million for the year ended December 31, 2021.

Total finance charge revenue for the year ended December 31, 2021 was $1,742.6 million.

The principal consideration for our determination of the allowance for credit losses, provision for credit losses and finance charge revenue as a critical audit matter is the high degree of subjectivity in evaluating the reasonableness of management’s estimate, including assumptions used in the models that derive the expected future cash flows.

The models used in the computation of the expected future cash flows are internally developed and determine the amount and timing of the initial forecast and the current forecast of expected future cash flows.

Our audit procedures related to the allowance for credit losses, provision for credit losses and finance charge revenue include testing the design and operating effectiveness of key controls related to the models, including controls over the development and validation of the models, the completeness and accuracy of information used in the models, management review controls over the models and segregation of duties for maintaining the models.

With the assistance of an internal specialist, we assessed the reasonableness of the methodology used in the models that compute the expected future cash flows.

We recomputed the initial and current forecasts for a sample of Loans.

We tested the underlying data, including Loan balances and other characteristics included on the Consumer Loan and collections for that sample.

We also assessed the reasonableness of the COVID-19 adjustment applied to the expected future cash flows, considering internal and external factors.

We assessed the reasonableness of the timing of the future cash flows based on management’s assumptions and historical actual cash flows.

We analyzed the historical forecasts against actuals to determine if management has the ability to accurately predict initial and current forecasts of future cash flows.

We sampled new Loans during 2021 and confirmed the balance with the Dealer and/or agreed to the Consumer Loan for completeness and accuracy.

We sampled collections made during 2021 to verify completeness, accuracy and application to the appropriate Loans.

The principal consideration for our determination that the allowance for credit losses, provision for credit losses and finance charge revenue is a critical audit matter is the high degree of subjectivity that is involved in evaluating the reasonableness of management’s estimate, including assumptions used in the models that derive the expected future cash flows.

The models used in the computation of the expected future cash flows are internally developed and determine the amount and timing of expected future cash flows for both the initial forecast and the current forecast.

Our audit procedures related to the allowance for credit losses, provision for credit losses and finance charge revenue included the following, among others:

We tested the design and operating effectiveness of relevant controls related to the models, including controls over the development and validation of the models, the completeness and accuracy of information used in the models, management review controls over the models and segregation of duties for maintaining the models.

With the assistance of an internal specialist, we assessed the reasonableness of the methodology used in the enhancement of the models that support or compute the expected future cash flows, including removal of the COVID-19 adjustment.

We recomputed the initial and current forecast of expected future cash flows for a sample of Loans utilizing the new variables.

We tested the underlying data including Loan balances and other characteristics included on the Consumer Loan documents and collections for that sample.

We assessed the reasonableness of the timing of the expected future cash flows based on historical cash flows.

We analyzed the historical forecasts against actual cash flows to evaluate if management has the ability to predict initial and current forecasts of future cash flows.

We sampled new Loans during 2022 and confirmed the balance with the Dealer and/or agreed to the Consumer Loan documents for completeness and accuracy.

We sampled collections received during 2022 to verify completeness, accuracy, and application to the appropriate Loans.

We recalculated the effective interest rate for a sample of Loans based on the contractual cash flows less estimated dealer holdback or we agreed to the prior year rate, based on the applicable method described above.

We recomputed the provision for credit losses for a sample of new Loans by computing the difference between the initial Loan balance and the present value of expected future net cash flows discounted at the effective interest rate.

We recomputed the present value of expected future net cash flows discounted at the effective interest rate and the initial provision for credit losses for a sample of new Consumer Loan assignments.

We selected a sample of Loans to recompute the provision for credit losses, allowance for credit losses and finance charge revenue for the year-ended December 31, 2022.

For the sample tested, we also recomputed the dealer holdback, if applicable.

For the sample tested, we also recomputed the estimated dealer holdback, if applicable.

We also assessed the correlation of changes in the allowance for credit losses to collections for a sample of Loans.

We tested sensitivity around the partial write-off policy.

We analyzed and agreed the past-due status of Loans to collection details and verified the allowance for credit losses was consistent with the status of the Loans.

We analyzed the forecast enhancement in 2022 on the same sample of Loans.

/s/ GRANT THORNTON LLP

32 unchanged sentences

Retained earnings 1,381.1 1,626.7

Accumulated other comprehensive income 0.2 1.6

Accumulated other comprehensive income (loss) ( 2.9 ) 0.2

Total Shareholders’ Equity 1,624.0 1,824.2

43 unchanged sentences

Stock-based compensation — — 6.2 — — 6.2

Restricted stock awards, net of forfeitures

4,827 — — — — —

Forfeiture of restricted stock awards ( 152 ) — — — — —

Repurchase of common stock ( 1,282,166 ) — ( 2.0 ) ( 478.8 ) — ( 480.8 )

3 unchanged sentences

Net income — — — 958.3 — 958.3

Other comprehensive income — — — — 0.8 0.8

Other comprehensive loss — — — — ( 1.4 ) ( 1.4 )

Stock-based compensation — — 24.8 — — 24.8

Restricted stock awards, net of forfeitures

( 152 ) — — — — —

Forfeiture of restricted stock awards ( 109,085 ) — — — — —

Repurchase of common stock ( 2,884,126 ) ( 0.1 ) ( 1.3 ) ( 1,470.4 ) — ( 1,471.8 )

1 unchanged sentence

11,416 — — — — —

Stock options exercised 35,251 — 11.8 — — 11.8

Balance, December 31, 2021 14,145,888 0.1 197.2 1,626.7 0.2 1,824.2

2 unchanged sentences

Stock-based compensation — — 36.5 — — 36.5

Restricted stock awards, net of forfeitures

( 109,085 ) — — — — —

Repurchase of common stock ( 1,491,481 ) — ( 3.1 ) ( 781.4 ) — ( 784.5 )

13 unchanged sentences

Amortization 16.6 16.6 15.0

Provision for deferred income taxes 44.7 68.3 85.5

Provision (credit) for deferred income taxes ( 7.7 ) 44.7 68.3

Stock-based compensation 36.5 24.8 6.2

4 unchanged sentences

Decrease (increase) in income taxes receivable 100.5 37.8 ( 80.8 )

Decrease in income taxes payable — — ( 2.3 )

Increase in income taxes payable 2.3 — —

Decrease (increase) in other assets ( 3.9 ) ( 19.8 ) 1.5

16 unchanged sentences

Repayments of secured financing ( 1,599.2 ) ( 1,729.0 ) ( 2,427.2 )

Proceeds from issuance of senior notes — — 800.0

Repayment of senior notes — — ( 401.8 )

3 unchanged sentences

Other 16.3 ( 0.8 ) ( 0.8 )

Net cash provided by (used in) financing activities ( 1,468.7 ) ( 433.2 ) 400.3

Net cash used in financing activities ( 794.6 ) ( 1,468.7 ) ( 433.2 )

Net increase (decrease) in cash and cash equivalents and restricted cash and cash equivalents ( 16.5 ) 38.0 ( 121.5 )

18 unchanged sentences

We are an indirect lender from a legal perspective, meaning the Consumer Loan is originated by the Dealer and assigned to us.

Substantially all of the Consumer Loans assigned to us are made to consumers with impaired or limited credit histories.

The vast majority of the Consumer Loans assigned to us are made to consumers with impaired or limited credit histories.

The following table shows the percentage of Consumer Loans assigned to us with either FICO ® scores below 650 or no FICO ® scores:

27 unchanged sentences

Cash advanced to the Dealer is automatically assigned to the Dealer’s open pool of advances.

Prior to August 5, 2019, we generally required Dealers to group advances into pools of at least 100 Consumer Loans.

Beginning August 5, 2019, Dealers may also elect to close a pool containing at least 50 Consumer Loans and assign subsequent advances to a new pool.

Dealers make an election as to how many Consumer Loans (either 50 or 100) will be assigned to an open pool before it is closed, and subsequent advances are assigned to a new pool.

Unless we receive a request from the Dealer to keep a pool open, we automatically close each pool based on the Dealer’s election.

21 unchanged sentences

Program Enrollment

Beginning August 5, 2019, Dealers may enroll in our Portfolio Program without incurring an enrollment fee.

Prior to August 5, 2019, Dealers enrolled in our Portfolio Program by (1) paying an up-front, one-time fee of $ 9,850 , or (2) agreeing to allow us to retain 50 % of their accelerated Dealer Holdback payment(s) on the first 100 Consumer Loan assignments.

Dealers are granted access to our Portfolio Program upon enrollment.

Access to the Purchase Program is typically only granted to Dealers that meet one of the following:

10 unchanged sentences

(“BVPP”), Vehicle Remarketing Services, Inc.

(“VRS”), VSC Re Company (“VSC Re”), 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 2019-1, Credit Acceptance Funding LLC 2019-2, Credit Acceptance Funding LLC 2019-3, Credit Acceptance Funding LLC 2020-1, Credit Acceptance Funding LLC 2020-2 Credit Acceptance Funding LLC 2020-3, Credit Acceptance Funding LLC 2021-1, Credit Acceptance Funding LLC 2021-2, Credit Acceptance Funding LLC 2021-3 and Credit Acceptance Funding LLC 2021-4.

(“VRS”), VSC Re Company (“VSC Re”), 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 2019-2, Credit Acceptance Funding LLC 2019-3, Credit Acceptance Funding LLC 2020-1, Credit Acceptance Funding LLC 2020-2, Credit Acceptance Funding LLC 2020-3, Credit Acceptance Funding LLC 2021-1, Credit Acceptance Funding LLC 2021-2, Credit Acceptance Funding LLC 2021-3, Credit Acceptance Funding LLC 2021-4, Credit Acceptance Funding LLC 2022-1, Credit Acceptance Funding LLC 2022-2, and Credit Acceptance Funding LLC 2022-3.

Business Segment Information

10 unchanged sentences

As of December 31, 2022 and 2021, we had $ 406.5 million and $ 407.9 million, respectively, in restricted cash and cash equivalents that were not insured by the FDIC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

The following table provides a reconciliation of cash and cash equivalents and restricted cash and cash equivalents reported in our consolidated balance sheets to the total shown in our consolidated statements of cash flows:

9 unchanged sentences

Debt securities for which we do not have the intent or ability to hold to maturity are classified as available for sale, and stated at fair value with unrealized gains and losses, net of income taxes included in the determination of comprehensive income and reported as a component of shareholders’ equity.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Loans Receivable and Allowance for Credit Losses

22 unchanged sentences

• We only accept Consumer Loan assignments from Dealers located within the United States.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

2021 and 2020 Recognition and Measurement Policies.

Recognition and Measurement Policies.

On January 1, 2020, we adopted Accounting Standards Update 2016-13, Measurement of Credit Losses on Financial Instruments, which is known as the current expected credit loss model, or CECL.

3 unchanged sentences

• increased the Loans receivable and the related allowance for credit losses balances by the present value of the difference between contractual future net cash flows and expected future net cash flows discounted at the effective interest rate.

This “gross-up” did not impact the net carrying amount of Loans (Loans receivable less allowance for credit losses) or net income.

This “gross-up” did not impact the net carrying amount of Loans (Loans receivable less allowance for credit losses) or consolidated net income.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Under the PCD Method, for each reporting period subsequent to the adoption of CECL, we:

10 unchanged sentences

The initial allowance for credit losses is recognized as provision for credit losses expense.

The effective interest rate and initial allowance for credit losses are significantly higher for Consumer Loans assigned under the Purchase Program than for Consumer Loans assigned under the Portfolio Program, as contractual net cash flows exceed expected net cash flows by a significantly greater margin under the Purchase Program.

Under the Purchase Program, we retain all contractual collections that exceed our initial expectations.

Under the Portfolio Program, contractual collections that exceed our initial expectations are substantially offset by additional Dealer Holdback payments.

Under the Originated Method, for each reporting period subsequent to assignment, we:

2 unchanged sentences

The adjustment to the allowance for credit losses is recognized as either provision for credit losses expense or a reversal of provision for credit losses expense.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

2019 Recognition and Measurement Policies.

Prior to the adoption of CECL on January 1, 2020, we accounted for our Loans as loans acquired with significant credit deterioration.

At the time of assignment, we:

• calculated an effective interest rate based on expected future net cash flows;

• recorded a Loan receivable equal to the advance paid to the Dealer under the Portfolio Program or purchase price paid to the Dealer under the Purchase Program.

For each reporting period subsequent to assignment, we:

• recalculated an effective interest rate based on expected future net cash flows;

• recognized finance charge revenue using the greater of the effective interest rate that was calculated for the reporting period or the effective interest rate that was calculated at the time of assignment, both of which were based on expected future net cash flows;

• recorded or adjusted an allowance for credit losses, if necessary, to reduce the net carrying amount of each Loan to the present value of expected future net cash flows discounted at the effective interest rate that was calculated at the time of assignment.

The initial allowance for credit losses was recognized as provision for credit losses expense and the adjustment to the allowance for credit losses was recognized as either provision for credit losses expense or a reversal of provision for credit losses expense.

Loans Receivable .

12 unchanged sentences

transfers out.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Under our Portfolio Program, certain events may result in Dealers forfeiting their rights to Dealer Holdback.

9 unchanged sentences

Expected future Dealer Holdback payments are forecasted for each individual Dealer based on the expected future collections and current advance balance of each Dealer Loan.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

We fully write off the outstanding balances of a Loan and the related allowance for credit losses once we are no longer forecasting any expected future net cash flows on the Loan.

In addition, on January 1, 2020, we adopted a partial write-off policy in connection with the adoption of CECL.

Under our partial write-off policy, we write off the amount of the outstanding balances of a Loan and the related allowance for credit losses, if any, that exceeds 200% of the present value of expected future net cash flows on the Loan, as we deem this amount to be uncollectable.

Credit Quality.

Substantially all of the Consumer Loans assigned to us are made to individuals with impaired or limited credit histories.

The vast majority of the Consumer Loans assigned to us are made to individuals with impaired or limited credit histories.

Consumer Loans made to these individuals generally entail a higher risk of delinquency, default, and repossession and higher losses than loans made to consumers with better credit.

16 unchanged sentences

During the first quarter of 2020, we reduced forecasted collection rates to reflect the estimated long-term impact of COVID-19 on Consumer Loan performance.

During the first quarter of 2022, we removed the COVID-19 forecast adjustment (as defined in Note 5) from our estimate of future net cash flows and enhanced our methodology for forecasting the amount and timing of future net cash flows from our Loan portfolio through the utilization of more recent data and new forecast variables.

For additional information, see Note 5.

For the three year period ended December 31, 2022, we did not make any other methodology changes for Loans that had a material impact on our financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Property and Equipment

10 unchanged sentences

For additional information regarding our property and equipment, see Note 6 to the consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Deferred Debt Issuance Costs

32 unchanged sentences

TPPs process claims on GAP contracts that are underwritten by third party insurers.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Program fees represent monthly fees charged to Dealers for access to our Credit Approval Processing System (“CAPS”);

3 unchanged sentences

We charge a monthly fee of $ 599 to Dealers participating in our Portfolio Program and we collect it from future Dealer Holdback payments.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Recognition Policy.

3 unchanged sentences

For Consumer Loans assigned prior to January 1, 2020, the effective interest rate was determined based on expected future net cash flows.

In connection with the adoption of CECL on January 1, 2020, we have elected to report the change in the present value of credit losses attributable to the passage of time as a reduction to finance charges.

As a result, for financial statement periods beginning after December 31, 2019, we allocate finance charges recognized on each Loan between the Loan receivable and the related allowance for credit losses.

We report the change in the present value of credit losses attributable to the passage of time as a reduction to finance charges.

Accordingly, we allocate finance charges recognized on each Loan between the Loan receivable and the related allowance for credit losses.

The amount of finance charges allocated to the Loan receivable is equal to the effective interest rate applied to the Loans receivable balance.

The reduction of finance charges allocated to the allowance for credit losses is equal to the effective interest rate applied to the allowance for credit losses balance.

For financial statement periods beginning prior to January 1, 2020, the entire amount of finance charges recognized on each Loan was allocated to the Loan receivable.

VSC Re, our wholly owned subsidiary, is engaged in the business of reinsuring coverage under vehicle service contracts sold to consumers by Dealers on vehicles financed by us.

21 unchanged sentences

We apply a fair-value-based measurement method in accounting for stock-based compensation plans and recognize stock-based compensation expense over the requisite service period of the grant as salaries and wages expense.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Employee Benefit Plan

3 unchanged sentences

For the years ended December 31, 2022, 2021 and 2020, we recognized compensation expense of $ 8.5 million, $ 7.5 million, and $ 7.2 million, respectively, for our matching contributions to the plan.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Provisions for federal, state, and foreign income taxes are calculated on reported pre-tax earnings based on current tax law and also include, in the current period, the cumulative effect of any changes in tax rates from those used previously in determining deferred tax assets and liabilities.

11 unchanged sentences

Advertising expenses were $ 1.0 million for the year ended December 31, 2022, $ 0.3 million for the year ended December 31, 2021, and $ 0.1 million for the year ended December 31, 2020.

New Accounting Update Adopted During the Current Year

Simplifying the Accounting for Income Taxes.

In December 2019, the FASB issued ASU 2019-12, which intends to enhance and simplify various aspects of the income tax accounting guidance, including requirements impacting the allocation of income tax expense to certain legal entities and interim-period accounting for enacted changes in tax law.

The adoption of ASU 2019-12 on January 1, 2021 did not have a material impact on our consolidated financial statements and related disclosures.

New Accounting Update Not Yet Adopted

Troubled Debt Restructurings and Vintage Disclosures.

In March 2022, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2022-02, which intends to improve the usefulness of information provided to investors about certain loan refinancings, restructurings, and write-offs.

ASU 2022-02 is effective for fiscal years, and interim periods, beginning after December 15, 2022.

The adoption of ASU 2022-02 will expand our write-off disclosures.

Reclassification

Certain amounts from prior periods have been reclassified to conform to the current presentation.

Subsequent Events

15 unchanged sentences

Secured Financing.

The fair value of our Term ABS financings is determined using quoted market prices;

however, these instruments trade in a market with a low trading volume.

For our warehouse facilities, the fair values are determined by calculating the present value of each debt instrument based on current rates for debt with similar risk profiles and maturities.

The fair value of certain Term ABS financings is determined using quoted market prices in an active market.

For our warehouse facilities and certain other Term ABS financings, the fair values are determined by calculating the present value of each debt instrument based on current rates for debt with similar risk profiles and maturities.

Senior Notes.

168 unchanged sentences

$ 5,869.6 $ 4,255.2 $ 10,124.8 $ ( 1,702.1 ) $ ( 1,634.8 ) $ ( 3,336.9 ) $ 4,167.5 $ 2,620.4 $ 6,787.9

Adoption of CECL (5)

940.2 1,523.4 2,463.6 ( 940.2 ) ( 1,523.4 ) ( 2,463.6 ) — — —

Finance charges

30 unchanged sentences

$ 4,623.3 $ 2,597.9 $ 7,221.2 $ ( 428.0 ) $ ( 108.0 ) $ ( 536.0 ) $ 4,195.3 $ 2,489.9 $ 6,685.2

Adoption of CECL (5)

940.2 1,523.4 2,463.6 ( 940.2 ) ( 1,523.4 ) ( 2,463.6 ) — — —

Finance charges

49 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(In millions)

For the Year Ended December 31, 2020

Provision for Credit Losses

Purchased Loans

New Consumer Loan assignments

$ 209.7 $ 308.9 $ 518.6

Forecast changes

30.0 8.3 38.3

$ 239.7 $ 317.2 $ 556.9

The net Loan income (finance charge revenue less provision for credit losses expense) that we will recognize over the life of a Loan equals the cash we collect from the underlying Consumer Loan less the cash we pay to the Dealer.

44 unchanged sentences

Provision for credit losses expense at the time of assignment

$ ( 209.7 ) $ ( 308.9 ) $ ( 518.6 )

Expected future finance charges at the time of assignment (4)

8 unchanged sentences

The Purchased Loans amount represents one-time payments made to Dealers to purchase Consumer Loans assigned under our Purchase Program.

The Loan amounts also represent the fair value at the time of assignment.

(4) Represents revenue that is expected to be recognized on a level-yield basis over the lives of the Loans.

181 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

During the first quarter of 2020, we reduced our estimate of future net cash flows from our Loan portfolio by $ 206.5 million, or 2.3 % of the forecasted net cash flows at the start of the period, primarily due to the impact of the COVID-19 pandemic.

The reduction was comprised of:

(1) $ 44.3 million calculated by our forecasting model, which reflected lower realized collections during the first quarter of 2020 and (2) an additional $ 162.2 million, which represented our best estimate of the future impact of the COVID-19 pandemic on future net cash flows.

Under CECL, changes in the amount and timing of forecasted net cash flows are recorded as a provision for credit losses in the current period.

We have continued to apply this adjustment to our forecast through the end of 2021 as it continues to represent our best estimate of the impact of the COVID-19 pandemic on future net cash flows.

The COVID-19 pandemic has created conditions that increase the level of uncertainty associated with our estimate of the amount and timing of future net cash flows from our Loan portfolio.

Additional Prior Year Loan Disclosure

The adoption of CECL on January 1, 2020 eliminated the following disclosure for 2020 and 2021 that was required in prior years.

The excess of expected net cash flows over the outstanding balance of Loans receivable, net is referred to as the accretable yield and is recognized on a level-yield basis as finance charge income over the remaining lives of the Loans.

A summary of changes in the accretable yield is as follows:

(In millions) For the Year Ended December 31, 2019

Dealer Loans Purchased Loans Total

Balance, beginning of period $ 1,283.0 $ 782.5 $ 2,065.5

New Consumer Loan assignments (1) 971.6 561.2 1,532.8

Accretion (2) ( 897.5 ) ( 480.7 ) ( 1,378.2 )

Provision for credit losses 65.9 10.5 76.4

Forecast changes ( 7.9 ) 22.5 14.6

Transfers (3) ( 33.3 ) 42.2 8.9

Balance, end of period $ 1,381.8 $ 938.2 $ 2,320.0

(1) The Dealer Loans amount represents the net cash flows expected at the time of assignment on Consumer Loans assigned under our Portfolio Program, less the related advances paid to Dealers.

The Purchased Loans amount represents the net cash flows expected at the time of assignment on Consumer Loans assigned under our Purchase Program, less the related one-time payments made to Dealers.

(2) Represents finance charges excluding the amortization of deferred direct origination costs for Dealer Loans.

(3) Under our Portfolio Program, certain events may result in Dealers forfeiting their rights to Dealer Holdback.

We transfer the Dealer’s outstanding Dealer Loan balance, the related allowance for credit losses balance and related expected future net cash flows to Purchased Loans in the period this forfeiture occurs.

The COVID-19 pandemic created conditions that increased the level of uncertainty associated with our estimate of the amount and timing of future net cash flows from our Loan portfolio.

During the first quarter of 2020, we applied a subjective adjustment to our forecasting model to reflect our best estimate of the future impact of the COVID-19 pandemic on future net cash flows (“COVID forecast adjustment”), which reduced our estimate of future net cash flows by $162.2 million.

We continued to apply the COVID forecast adjustment through the end of 2021, as it continued to represent our best estimate.

During the first quarter of 2022, we determined that we had sufficient Consumer Loan performance experience since the lapse of federal stimulus payments and enhanced unemployment benefits to refine our estimate of future net cash flows.

Accordingly, during the first quarter of 2022, we removed the COVID forecast adjustment and enhanced our methodology for forecasting the amount and timing of future net cash flows from our Loan portfolio through the utilization of more recent data and new forecast variables.

Under CECL, changes in the amount and timing of forecasted net cash flows are recorded as a provision for credit losses in the period of change.

The removal of the COVID forecast adjustment and the implementation of the enhanced forecasting methodology during the first quarter of 2022 impacted forecasted net cash flows and provision for credit losses as follows:

(In millions) Increase / (Decrease) in

Forecasting Methodology Changes Forecasted Net Cash Flows Provision for Credit Losses

Removal of COVID forecast adjustment $ 149.5 $ ( 118.5 )

Implementation of enhanced forecasting methodology ( 53.8 ) 47.9

Total 95.7 ( 70.6 )

PROPERTY AND EQUIPMENT

9 unchanged sentences

Total property and equipment, net $ 51.4 $ 57.3

As the vast majority of our team members now work remotely, we have significant excess space in the two office buildings that we own.

We are actively exploring options to reduce our office space, which could result in the sale or lease of one or both of our buildings.

As there is currently a significant amount of unoccupied office space, we believe the market value of our buildings and improvements, land and land improvements, and office furniture and equipment is significantly less than their combined carrying value.

If we were to reclassify one or both of these buildings as held for sale, we would be required to record an impairment charge to reduce their carrying value to their estimated market value less costs to sell.

Depreciation expense on property and equipment was $ 9.0 million, $ 9.7 million, and $ 8.8 million for the years ended December 31, 2022, 2021, and 2020, respectively.

43 unchanged sentences

Remarketing fees 13.4 7.8 7.1

Interest 6.6 1.2 2.9

Dealer enrollment fees 1.7 1.9 3.0

Dealer support products and services 1.2 1.3 1.9

Interest 1.2 2.9 8.5

GPS-SID fees — — 1.9

Other ( 0.1 ) 0.7 1.2

5 unchanged sentences

VRS recognizes income from the retained fees at the time of the sale and does not retain a fee if a repossessed vehicle is redeemed by the consumer prior to the sale.

Dealer enrollment fees include fees from Dealers that enrolled in our Portfolio Program prior to August 5, 2019.

Depending on the enrollment option selected by the Dealer, Dealers may have enrolled by paying us an upfront, one-time fee, or by agreeing to allow us to retain 50 % of their accelerated Dealer Holdback payment(s) on the first 100 Consumer Loan assignments.

For additional information regarding program enrollment, see Note 1 to the consolidated financial statements.

A portion of the $ 9,850 upfront, one-time fee is considered to be Dealer support products and services revenue.

The remaining portion of the $ 9,850 fee is considered to be a Dealer enrollment fee, which is amortized on a straight-line basis over the estimated life of the Dealer relationship.

The 50 % portion of the accelerated Dealer Holdback payment(s) on the first 100 Consumer Loan assignments is also considered to be a Dealer enrollment fee.

Interest consists of income earned on cash and cash equivalents, restricted cash and cash equivalents, and restricted securities available for sale.

Interest income is generally recognized over time as it is earned.

Interest income on restricted securities available for sale is recognized over the life of the underlying financial instruments using the interest method.

Dealer enrollment fees consist of fees from Dealers that enrolled in our Portfolio Program prior to August 5, 2019.

Depending on the enrollment option selected by the Dealer, Dealers may have enrolled by paying us an upfront, one-time fee of $ 9,850 , or by agreeing to allow us to retain 50 % of their accelerated Dealer Holdback payment(s) on the first 100 Consumer Loan assignments.

A portion of the $ 9,850 upfront, one-time fee was considered to be a Dealer enrollment fee, which was amortized on a straight-line basis over the estimated life of the Dealer relationship.

In the case of Dealers that enrolled by agreeing to allow us to retain 50 % of their accelerated Dealer Holdback payment(s) on the first 100 Consumer Loan assignments, the 50 % portion we retain is considered to be a Dealer enrollment fee.

We do not recognize any of this Dealer enrollment fee until the Dealer has met the eligibility requirements to receive the accelerated Dealer Holdback payment(s) and the amount(s) of the payment(s), if any, have been calculated.

Once the accelerated Dealer Holdback payment(s) have been calculated, we defer the 50 % portion that we keep and recognize it on a straight-line basis over the remaining estimated life of the Dealer relationship.

Beginning August 5, 2019, Dealers may enroll in our Portfolio Program without incurring an enrollment fee.

Beginning August 5, 2019, Dealers enroll in our Portfolio Program without incurring an enrollment fee.

Dealer support products and services consist of income earned from products and services provided to Dealers to assist with their operations, including sales and marketing, purchasing supplies and materials, and acquiring vehicle inventory.

Income is recognized in the period the product or service is provided.

Interest consists of income earned on cash and cash equivalents, restricted cash and cash equivalents, and restricted securities available for sale.

Interest income is generally recognized over time as it is earned.

Interest income on restricted securities available for sale is recognized over the life of the underlying financial instruments using the interest method.

GPS-SID fees consist of fees we received from a TPP for providing Dealers in certain states the ability to purchase GPS Starter Interrupt Devices (“GPS-SID”).

Through this program, Dealers could install GPS-SID on vehicles financed by us that can be activated if the consumer fails to make payments on their account, and can result in the prompt repossession of the vehicle.

Dealers purchased GPS-SID directly from the TPP and the TPP paid us a vendor fee for each device sold.

GPS-SID fee income was recognized when the units were sold.

Effective during the second quarter of 2019, we no longer provide Dealers the ability to purchase GPS-SID through this program.

We allowed Dealers to install previously purchased GPS-SID on vehicles financed by us until September 1, 2019.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

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(In millions) For the Year Ended December 31, 2022

Ancillary product profit sharing Remarketing fees Dealer enrollment fees Dealer support products and services Interest Other Total Other Income

Ancillary product profit sharing Remarketing fees Interest Dealer enrollment fees Dealer support products and services Other Total Other Income

Source of income

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(In millions) As of December 31, 2022

Principal Outstanding Unamortized Debt Issuance Costs Carrying

Principal Outstanding Unamortized Debt Issuance Costs Unamortized Discount Carrying

Revolving secured line of credit (1) $ 30.9 $ — $ — $ 30.9

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(In millions) As of December 31, 2021

Principal Outstanding Unamortized Debt Issuance Costs Carrying

Principal Outstanding Unamortized Debt Issuance Costs Unamortized Discount Carrying

Revolving secured line of credit (1) $ 2.6 $ — $ — $ 2.6

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Revolving Secured

Line of Credit n/a 06/22/24 $ 435.0 (1) At our option, either LIBOR plus 187.5 basis points or the prime rate plus 87.5 basis points

Line of Credit n/a 06/22/25 $ 410.0 (1) At our option, either the Bloomberg Short-Term Bank Yield Index rate (BSBY) plus 187.5 basis points or the prime rate plus 87.5 basis points

Warehouse Facility II (2) CAC Warehouse Funding LLC II 04/30/24 (3) $ 400.0 LIBOR plus 175 basis points (4)

Warehouse Facility IV (2) CAC Warehouse Funding LLC IV 11/17/23 (3) $ 300.0 LIBOR plus 210 basis points (4)

Warehouse Facility V (2) CAC Warehouse Funding LLC V 12/18/23 (5) $ 125.0 LIBOR plus 225 basis points (4)

Warehouse Facility VI (2) CAC Warehouse Funding LLC VI 09/30/24 (3) $ 75.0 LIBOR plus 200 basis points

Warehouse Facility VIII (2) CAC Warehouse Funding LLC VIII 09/01/24 (3) $ 200.0 LIBOR plus 190 basis points (4)

Warehouse Facility IV (2) CAC Warehouse Funding LLC IV 05/20/25 (3) $ 300.0 The Secured Overnight Financing Rate (SOFR) plus 221.4 basis points (4)

Warehouse Facility V (2) CAC Warehouse Funding LLC V 12/29/25 (5) $ 200.0 SOFR plus 245 basis points (4)

Warehouse Facility VI (2) CAC Warehouse Funding LLC VI 09/30/24 (3) $ 75.0 BSBY plus 200 basis points

Warehouse Facility VIII (2) CAC Warehouse Funding LLC VIII 09/01/24 (3) $ 200.0 SOFR plus 201.4 basis points (4)

Term ABS 2019-2 (2) Credit Acceptance Funding LLC 2019-2 08/15/25 (6) $ 500.0 Fixed rate

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Term ABS 2020-3 (2) Credit Acceptance Funding LLC 2020-3 10/17/22 (3) $ 600.0 Fixed rate

Term ABS 2021-1 (2) Credit Acceptance Funding LLC 2021-1 12/16/24 (6) $ 100.0 SOFR plus 220 basis points (4)

Term ABS 2021-2 (2) Credit Acceptance Funding LLC 2021-2 02/15/23 (3) $ 500.0 Fixed rate

Term ABS 2021-1 (2) Credit Acceptance Funding LLC 2021-1 02/15/23 (3) $ 100.0 LIBOR plus 198.5 basis points (4)

Term ABS 2021-3 (2) Credit Acceptance Funding LLC 2021-3 05/15/23 (3) $ 450.0 Fixed rate

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Term ABS 2022-1 (2) Credit Acceptance Funding LLC 2022-1 06/17/24 (3) $ 350.0 Fixed rate

Term ABS 2022-2 (2) Credit Acceptance Funding LLC 2022-2 12/15/25 (6) $ 200.0 SOFR plus 235 basis points (4)

Term ABS 2022-3 (2) Credit Acceptance Funding LLC 2022-3 10/15/24 (3) $ 389.9 Fixed rate

2024 Senior Notes n/a 12/31/24 $ 400.0 Fixed rate

2026 Senior Notes n/a 03/15/26 $ 400.0 Fixed rate

Mortgage Note (2) Chapter 4 Properties, LLC 08/06/23 $ 12.0 LIBOR plus 150 basis points

(1) The amount of the facility will decrease by $35.0 million on June 22, 2022, and will further decrease by $25.0 million on June 22, 2023.

Mortgage Note (2) Chapter 4 Properties, LLC 08/06/28 $ 9.0 BSBY plus 150 basis points

(1) The amount of the facility will decrease by $25.0 million on June 22, 2023.

(2) Financing made available only to a specified subsidiary of the Company.

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Average outstanding principal balance 23.1 —

Warehouse Facility VII

Maximum outstanding principal balance $ — $ 125.0

Average outstanding principal balance — 61.9

Warehouse Facility VIII

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Interest rate — % — %

Warehouse Facility VII

Warehouse Facility VIII

Principal balance outstanding $ — $ —

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Interest rate — % — %

Warehouse Facility VIII

Term ABS 2019-1

Principal balance outstanding $ — $ 124.6

Amount available for borrowing (1) 200.0 200.0

Loans pledged as collateral — 292.4

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Term ABS 2022-1

Principal balance outstanding $ 600.0 $ 600.0

Balance outstanding $ 350.0 $ —

Loans pledged as collateral 434.7 —

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Term ABS 2022-2

Principal balance outstanding $ 100.0 $ —

Balance outstanding $ 200.0 $ —

Loans pledged as collateral 229.3 —

1 unchanged sentence

Interest rate 6.65 % — %

Term ABS 2022-3

Balance outstanding $ 389.9 $ —

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(Dollars in millions) As of December 31,

Term ABS 2021-2

Principal balance outstanding $ 500.0 $ —

Loans pledged as collateral 429.2 —

1 unchanged sentence

Interest rate 7.68 % — %

Term ABS 2021-3

Principal balance outstanding $ 450.0 $ —

Loans pledged as collateral 619.8 —

Restricted cash and cash equivalents pledged as collateral 46.5 —

Interest rate 1.14 % — %

Term ABS 2021-4

Principal balance outstanding $ 250.1 $ —

Loans pledged as collateral 281.2 —

Restricted cash and cash equivalents pledged as collateral 22.1 —

Interest rate 1.44 % — %

2024 Senior Notes

7 unchanged sentences

Interest rate 5.46 % 1.60 %

(1) Availability may be limited by the amount of assets pledged as collateral.

Revolving Secured Line of Credit Facility

We have a $ 410.0 million revolving secured line of credit facility with a commercial bank syndicate.

The amount of the facility will decrease by $ 35.0 million on June 22, 2022, and will further decrease by $ 25.0 million on June 22, 2023.

The amount of the facility will decrease by $ 25.0 million on June 23, 2023.

Borrowings under the revolving secured line of credit facility, including any letters of credit issued under the facility, are subject to a borrowing-base limitation.

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Because the subsidiaries are organized as legal entities separate from us, their assets (including the contributed Loans) are not available to our creditors.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

The subsidiaries pay us a monthly servicing fee equal to 6 % ( 4 % for Warehouse Facility II and Warehouse Facility VIII) of the collections received with respect to the contributed Loans.

The subsidiaries pay us a monthly servicing fee equal to either 4 % or 6 %, depending upon the facility, of the collections received with respect to the contributed Loans.

The servicing fee is paid out of the collections.

1 unchanged sentence

If a facility is not amortizing, the applicable subsidiary is entitled to any collections remaining after the payment of interest, certain other transaction expenses, and any amounts necessary to satisfy the borrowing base requirements of the facility.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Term ABS Financings

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In connection with these transactions, we contributed Loans on an arms-length basis to each Funding LLC for cash and the sole membership interest in that Funding LLC.

In turn, each Funding LLC, other than those of Term ABS 2019-2 and 2021-1, contributed the Loans to the respective trusts that issued notes to qualified institutional investors.

The Funding LLCs for the Term ABS 2019-2 and 2021-1 transactions pledged the Loans to their respective lenders.

The Term ABS 2019-1, 2019-3, 2020-1, 2020-2, 2020-3, 2021-2, 2021-3 and 2021-4 transactions each consist of three classes of notes.

Each financing at the time of issuance has a specified revolving period during which we are likely to contribute additional Loans to each Funding LLC.

Each Funding LLC (other than those of Term ABS 2019-2 and 2021-1) will then contribute the Loans to its respective trust.

In turn, each Funding LLC, other than of the Funding LLCs for the Term ABS 2019-2, 2021-1, and 2022-2 financings, contributed the Loans to the respective trusts that issued notes to qualified institutional investors.

The Funding LLCs for the Term ABS 2019-2, 2021-1, and 2022-2 financings pledged the Loans to their respective lenders.

The Term ABS 2019-3, 2020-1, 2020-2, 2020-3, 2021-2, 2021-3, and 2021-4 financings each consist of three classes of notes, while the Term ABS 2022-1 and Term ABS 2022-3 financings consist of four classes of notes.

Each Term ABS financing at the time of issuance has a specified revolving period during which we are likely to contribute additional Loans to the applicable Funding LLC.

Each Funding LLC (other than the Funding LLCs of the Term ABS 2019-2, 2021-1, and 2022-2 financings) will then contribute the Loans to its respective trust.

At the end of the applicable revolving period, the debt outstanding under each financing will begin to amortize.

The financings create indebtedness for which the trusts or Funding LLCs are liable and which is secured by all the assets of each trust or Funding LLC.

The Term ABS financings create indebtedness for which the applicable trust or Funding LLC is liable and which is secured by all the assets of the applicable trust or Funding LLC.

Such indebtedness is non-recourse to us, even though we are consolidated for financial reporting purposes with the trusts and the Funding LLCs.

Because the Funding LLCs are organized as legal entities separate from us, their assets (including the contributed Loans) are not available to our creditors.

We receive a monthly servicing fee on each financing equal to 6 % ( 4 % for Term ABS 2021-2, 2021-3, and 2021-4) of the collections received with respect to the contributed Loans.

We receive a monthly servicing fee on each financing equal to either 4 % or 6 %, depending upon the financing, of the collections received with respect to the contributed Loans.

The fee is paid out of the collections.

1 unchanged sentence

If a facility is not amortizing, the applicable subsidiary may be entitled to retain any collections remaining after payment of interest, certain other transaction expenses, and any amounts necessary to satisfy the borrowing base requirements of the facility.

However, in our capacity as servicer of the Loans, we do have a limited right to exercise a “clean-up call” option to purchase Loans from the Funding LLCs and/or the trusts under certain specified circumstances.

However, in our capacity as servicer of the Loans, we have a limited right to exercise a “clean-up call” option to purchase Loans from the Funding LLCs and/or the trusts under certain specified circumstances.

For those Funding LLCs with a trust, when the trust’s underlying indebtedness is paid in full, either through collections or through a prepayment of the indebtedness, the trust is to pay any remaining collections over to its Funding LLC as the sole beneficiary of the trust.

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Contributed at Closing Revolving Period

Term ABS 2019-1 February 21, 2019 $ 503.1 Through February 15, 2021

Term ABS 2019-2 August 28, 2019 $ 625.1 Through August 15, 2025

3 unchanged sentences

Term ABS 2020-3 October 22, 2020 750.1 Through October 17, 2022

Term ABS 2021-1 January 29, 2021 125.1 Through February 15, 2023

Term ABS 2021-1 January 29, 2021 125.1 Through December 16, 2024

Term ABS 2021-2 February 18, 2021 625.1 Through February 15, 2023

1 unchanged sentence

Term ABS 2021-4 October 28, 2021 312.6 Through October 16, 2023

Term ABS 2022-1 June 16, 2022 437.6 Through June 17, 2024

Term ABS 2022-2 December 15, 2022 250.1 Through December 15, 2025

Term ABS 2022-3 November 3, 2022 500.1 Through October 15, 2024

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

17 unchanged sentences

Mortgage Note

On August 6, 2018, we entered into a $ 12.0 million mortgage note with a commercial bank that is secured by a first mortgage lien on a building acquired by us and an assignment of all leases, rents, revenues and profits under all present and future leases of the building.

The note matures on August 6, 2023, and bears interest at LIBOR plus 150 basis points.

We have a $ 9.0 million mortgage note with a commercial bank that is secured by a first mortgage lien on a building acquired by us and an assignment of all leases, rents, revenues, and profits under all present and future leases of the building.

The note matures on August 6, 2028, and bears interest at BSBY plus 150 basis points.

Principal Debt Maturities

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These covenants also limit the maximum ratio of our funded debt less unrestricted cash and cash equivalents to tangible net worth.

Additionally, we must maintain consolidated net income, as defined in the agreements, of not less than $ 1 for the two most recently ended fiscal quarters.

Additionally, for one of our Warehouse facilities, we must maintain consolidated net income, as defined in the agreement, of not less than $ 1 for the two most recently ended fiscal quarters.

Some of these covenants may indirectly limit the repurchase of common stock or payment of dividends on common stock.

14 unchanged sentences

200.0 Warehouse Facility VIII Cap Floating Rate 08/2019 08/2023 116.7 5.50 %

Cap Floating Rate 09/2022 09/2025 83.3 5.50 %

100.0 Term ABS 2021-1 Cap Floating Rate 02/2021 06/2024 100.0 5.50 %

200.0 Term ABS 2022-2 Cap Floating Rate 12/2022 06/2024 200.0 6.50 %

(Dollars in millions)

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300.0 Warehouse Facility IV Cap Floating Rate 07/2019 07/2023 300.0 6.50 %

Cap Floating Rate 05/2018 04/2021 50.0 6.50 %

Cap Floating Rate 07/2019 07/2023 216.7 6.50 %

125.0 Warehouse Facility V Cap Floating Rate 12/2020 01/2026 94.0 5.50 %

150.0 Warehouse Facility VII Cap Floating Rate 12/2017 11/2021 68.7 5.50 %

Cap Floating Rate 01/2020 12/2023 81.3 5.50 %

200.0 Warehouse Facility VIII Cap Floating Rate 08/2019 08/2023 200.0 5.50 %

(1) Rate excludes the spread over the corresponding LIBOR or commercial paper rate.

100.0 Term ABS 2021-1 Cap Floating Rate 02/2021 06/2024 100.0 5.50 %

(1) Rate excludes the spread over the corresponding benchmark rate.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

The interest rate caps have not been designated as hedging instruments.

As of December 31, 2021 and 2020, the interest rate caps had a fair value of $ 0.2 million and $ 0.1 million, respectively, as the capped rates were significantly above market rates.

As of December 31, 2022 and 2021, the interest rate caps had a fair value of $ 2.0 million and $ 0.2 million, respectively.

The increase in fair value from December 31, 2021 was the result of an increase in market rates.

Information related to the effect of derivative instruments not designated as hedging instruments on our consolidated statements of income for the years ended December 31, 2022, 2021, and 2020 is as follows:

(In millions) Amount of Loss

(In millions) Amount of (Income) Loss

Recognized in Income on Derivatives

46 unchanged sentences

federal statutory income tax rate 21.0 % 21.0 % 21.0 %

State income taxes 3.0 % 2.7 % 3.1 %

State and local income taxes 3.8 % 3.0 % 2.7 %

Excess tax benefits from stock-based compensation plans - 0.8 % - 0.3 % - 0.5 %

1 unchanged sentence

Effective income tax rate 24.7 % 24.0 % 23.4 %

State income taxes

The increase in our state income tax rate from 2020 to 2021 and the decrease in our state income tax rate from 2019 to 2020 were primarily the result of the settlement of an uncertain tax position for state income taxes during 2020.

State and local income taxes

The increase in our state and local income tax rate from 2021 to 2022 was primarily due to changes in state and local tax laws that were enacted during the third quarter of 2022, which are expected to increase our long-term effective income tax rate by approximately 20 basis points.

The enactment of these tax law changes increased our effective income tax rate by approximately 60 basis points basis points for the year ended December 31, 2022, of which 50 basis points related to the impact of tax law changes that are effective for future periods and 10 basis points related to the impact of tax law changes that were effective retroactively to the beginning of 2022.

The increase in our state and local income tax rate from 2020 to 2021 was primarily the result of the settlement of an uncertain tax position for state income taxes during 2020.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Excess tax benefits from stock-based compensation plans

During the first quarter of each year, we receive a tax benefit upon the vesting of restricted stock and the conversion of restricted stock units to common stock based on the fair value of the shares.

In addition, we receive a tax benefit upon the exercise of stock options.

The amount by which this tax benefit exceeds the grant-date fair value that was recognized as stock-based compensation expense is referred to as an excess tax benefit.

Excess tax benefits are recognized in provision for income taxes and reduce our effective income tax rate.

The impact of excess tax benefits on our effective income tax rate decreased from 2020 to 2021 primarily due to an increase in pre-tax income.

The impact of excess tax benefits on our effective income tax rate decreased from 2019 to 2020, primarily due to a decrease in the number of restricted stock units that were converted to common stock during 2020 due to the timing of our long-term stock award grants.

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 vests, restricted stock units are converted to common stock, or stock options are exercised.

Excess tax benefits reduce our effective income tax rate, while tax deficiencies increase our effective income tax rate.

The impact of excess tax benefits on our effective income tax rate for the year ended December 31, 2022 increased from the same period in 2021 primarily due to an increase in the number of restricted stock units that were converted to common stock during 2022 due to the timing of long-term stock award grants.

Other items impacting our effective income tax rate primarily consist of non-deductible executive compensation expense.

The impact of non-deductible executive compensation expense on our effective income tax rate for year ended December 31, 2022 increased in magnitude from the same period in 2021 primarily due to a decrease in pre-tax income.

Unrecognized Tax Benefits

12 unchanged sentences

Accrued interest related to uncertain tax positions was $ 13.2 million and $ 10.8 million as of December 31, 2022 and 2021, respectively.

We are subject to income tax in federal and state jurisdictions.

We are generally no longer subject to tax examinations on federal returns filed for years prior to 2018 and state returns filed for years prior to 2014.

We are subject to income tax in federal, state, and local jurisdictions.

We are generally no longer subject to tax examinations on federal returns filed for years prior to 2019 and state and local returns filed for years prior to 2015.

NET INCOME PER SHARE

10 unchanged sentences

Dilutive number of weighted average shares outstanding 13,625,081 16,100,552 17,935,779

For the year ended December 31, 2021, there were 349,222 stock options outstanding that were excluded from the computation of diluted net income per share because their inclusion would have been anti-dilutive.

For the year ended December 31, 2021, there were no shares of restricted stock or restricted stock units outstanding that were excluded from the computation of diluted net income per share because their inclusion would have been anti-dilutive.

For the years ended December 31, 2020 and 2019, there were no stock options, shares of restricted stock, or restricted stock units outstanding that were excluded from the computation of diluted net income per share because their inclusion would have been anti-dilutive.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

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 Years Ended December 31,

2022 2021 2020

Stock options 189,465 349,222 —

Restricted stock units 2,827 — —

Total 192,292 349,222 —

STOCK REPURCHASES

18 unchanged sentences

Based on the terms of individual stock option grant agreements, the stock options:

• vest and become exercisable in four equal annual installments beginning on the first anniversary of the date on which the options were granted, based on continuous employment or service, and

• vest and become exercisable in three or four equal annual installments beginning on the first anniversary of the date on which the options were granted, based on continuous employment or service, and

• expire either six or ten years from the date of the grant.

2 unchanged sentences

Shareholder Approval was received at our annual meeting of shareholders on July 21, 2021.

Accordingly, the accounting grant date of the 770,500 previously-awarded stock options is July 21, 2021.

Accordingly, the accounting grant date of the 770,500 previously-awarded stock options is July 21, 2021, and no expense was recognized for those stock options prior to that date.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

24 unchanged sentences

• For our former Chief Executive Officer, over a period of ten years , based on continuous employment and the cumulative improvement in our annual adjusted economic profit.

• For certain team members, over a period of three years , based on continuous employment.

• For certain team members, over a period of three or four years , based on continuous employment.

• For certain team members, over a period of one to four years , based on continuous employment and the compounded annual growth rate in our adjusted net income per diluted share, a non-GAAP financial measure.

17 unchanged sentences

Prior to 2020, we granted performance-based and time-based shares of restricted stock to team members in accordance with the Incentive Plan.

The grant-date fair value per share was estimated to equal the market price of our common stock on the date of grant.

Based on the terms of individual restricted stock grant agreements, shares vest under one of the following methods:

• For our former Chief Executive Officer, over a period of 15 years, based on continuous employment and a combination of the cumulative improvement in our annual adjusted economic profit, a non-GAAP financial measure, and the attainment of annual adjusted economic profit targets.

• For all other team members, over a period of three years , based on continuous employment.

A summary of the non-vested restricted stock activity under the Incentive Plan for the year ended December 31, 2021 is presented below:

Restricted Stock Number of Shares Weighted Average Grant-Date Fair Value Per Share

Non-vested as of December 31, 2020 122,718 $ 117.88

Vested ( 12,130 ) 177.77

Forfeited ( 109,085 ) 106.76

Non-vested as of December 31, 2021 1,503 $ 441.54

No shares of restricted stock were granted in 2020 and 2021.

The grant-date weighted average fair value of shares granted in 2019 was $ 441.54 .

The total fair value of shares vested was $ 8.3 million in 2021, $ 5.1 million in 2020 and $ 7.9 million in 2019.

As of December 31, 2022, there were no unvested shares of restricted stock.

During 2021, we recognized an $ 8.5 million reversal of stock-based compensation expense due to the forfeiture of 109,000 shares of unvested restricted stock upon the retirement of our former Chief Executive Officer in May 2021.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Stock-based compensation expense

6 unchanged sentences

Total $ 36.5 $ 24.8 $ 6.2

While the stock-based awards are often expected to vest in equal, annual installments over the corresponding requisite service periods of the grants, for certain grants the related stock-based compensation expense is not recognized on a straight-line basis over the same periods.

For restricted stock and restricted stock units granted prior to 2021, each installment was accounted for as a separate award and, as a result, the fair value of each installment is being recognized as stock-based compensation expense on a straight-line basis over the related expected vesting period.

Assuming performance targets are achieved in the periods currently estimated, we expect to recognize the remaining expense for stock-based awards outstanding as of December 31, 2022 over a weighted average period of 1.2 years, as follows:

6 unchanged sentences

2026 1.2 1.5 — 2.7

Thereafter — — — —

Total $ 75.1 $ 10.0 $ — $ 85.1

12 unchanged sentences

Our primary product consists of financing programs that enable Dealers to sell vehicles to consumers, regardless of their credit history.

We also provide Dealers the ability to offer or purchase ancillary products on vehicles financed by us.

We also provide Dealers the ability to offer ancillary products on vehicles financed by us.

Major Customer Information

16 unchanged sentences

As a result, we are unable to estimate the reasonably possible loss or range of reasonably possible loss arising from this investigation.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONCLUDED)

On October 2, 2020, a shareholder filed a putative class action complaint against the Company, its Chief Executive Officer and its Chief Financial Officer in the United States District Court for the Eastern District of Michigan, Southern Division, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5, promulgated thereunder, based on alleged false and/or misleading statements or omissions regarding the Company and its business, and seeking class certification, unspecified damages plus interest and attorney and expert witness fees and other costs on behalf of a purported class consisting of all persons and entities (subject to specified exceptions) that purchased or otherwise acquired Credit Acceptance common stock from November 1, 2019 through August 28, 2020.

On May 28, 2021, the court issued an opinion and order appointing lead plaintiff and lead counsel.

On July 22, 2021, the lead plaintiffs filed an amended complaint asserting similar violations, seeking similar relief and expanding the putative class to include all persons and entities (subject to specified exceptions) that purchased or otherwise acquired Credit Acceptance common stock from May 4, 2018 through August 28, 2020.

We cannot predict the duration or outcome of this lawsuit at this time.

As a result, we are unable to estimate the reasonably possible loss or range of reasonably possible loss arising from this lawsuit.

The Company intends to vigorously defend itself in this matter.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

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.

2 unchanged sentences

On November 16, 2020, we received an additional subpoena for documents from the Office of the New York State Attorney General.

On November 19, 2020, the Company received a letter from the Office of the New York State Attorney General stating that the New York State Attorney General is considering bringing claims against the Company under 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 in connection with the Company’s origination and securitization practices.

On November 19, 2020, the Company received a letter from the Office of the New York State Attorney General stating that the New York State Attorney General was considering bringing claims against the Company under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), New York Executive Law § 63(12), the New York Martin Act, and New York General Business Law § 349 in connection with the Company’s origination and securitization practices.

On December 9, 2020, we responded to the New York State Attorney General’s letter disputing the assertions contained therein.

1 unchanged sentence

On February 24 and April 30, 2021, we received additional subpoenas from the Office of the New York State Attorney General seeking information relating to its investigation.

We are cooperating with the investigation and cannot predict its 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 April 22, 2019, we received a civil investigative demand from the Bureau of Consumer Financial Protection (the “Bureau”) seeking, among other things, certain information relating to the Company’s origination and collection of Consumer Loans, TPPs and credit reporting.

On August 23, 2022, we received a letter from the Consumer Frauds and Protection Bureau of the Office of the New York State Attorney General stating that the Office of the New York State Attorney General intended to 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 Act, New York Executive Law § 63(12), the New York Martin Act and New York General Business Law § 349, and seeking to obtain injunctive relief, restitution, civil penalties, damages, disgorgement, reformation, rescission, costs and such other relief as the court may deem just and proper .

On January 4, 2023, the Office of the New York State Attorney General and the Bureau of Consumer Financial Protection (“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 Consumer Financial Protection Act of 2010 (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.

We cannot predict the eventual scope, duration, or outcome of this lawsuit at this time.

As a result, we are unable to estimate the reasonably possible loss or range of reasonably possible loss arising from this litigation.

The Company intends to vigorously defend itself in this matter.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

On April 22, 2019, we received a civil investigative demand from the Bureau seeking, among other things, certain information relating to the Company’s origination and collection of Consumer Loans, TPPs, and credit reporting.

On May 7, 2020, we received another civil investigative demand from the Bureau seeking additional information relating to its investigation.

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On June 3, 2021, we received another civil investigative demand from the Bureau seeking additional information relating to its investigation.

On December 6, 2021, we received a Notice and Opportunity to Respond and Advise (“NORA”) letter from the Staff of the Office of Enforcement (“Staff”) of the Bureau, stating that Staff is considering whether to recommend that the Bureau take legal action against the Company for alleged violations of the Consumer Financial Protection Act (the “CFPA”) in connection with the Company’s consumer loan origination practices.

The NORA letter states that the Bureau may allege that the Company (i) committed abusive and unfair acts or practices in violation of 12 U.S.C.

On December 6, 2021, we received a Notice and Opportunity to Respond and Advise (“NORA”) 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 CFPA in connection with the Company’s consumer loan origination practices.

The NORA letter stated that the Bureau may allege that the Company (i) committed abusive and unfair acts or practices in violation of 12 U.S.C.

§ 5531(c) and (d) and 12 U.S.C.

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§ 5536 (a)(3).

The NORA letter also states that, in connection with any action, the Bureau may seek all remedies available under the CFPA, including civil money penalties, consumer redress and injunctive relief.

The NORA letter also stated that, in connection with any action, the Bureau may seek all remedies available under the CFPA, including civil money penalties, consumer redress, and injunctive relief.

On January 18, 2022, the Company responded to the NORA letter disputing that it had committed any violations.

We cannot predict the eventual scope, duration or outcome of the investigation 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

On March 7, 2022, we received another civil investigative demand from the Bureau seeking additional information relating to its investigation.

As noted above, on January 4, 2023, the Bureau and the Office of the New York State Attorney General 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.

We cannot predict the eventual scope, duration, or outcome of the lawsuit at this time .

As a result, we are unable to estimate the reasonably possible loss or range of reasonably possible loss arising from this lawsuit.

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 40 other states (Alabama, Alaska, Arizona, Arkansas, California, 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.

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.

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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.

Litigation and Other Legal Matters Resolved during 2021

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Litigation Resolved during 2022

On October 2, 2020, a shareholder filed a putative class action complaint against the Company, its Chief Executive Officer (now former Chief Executive Officer), and its Chief Financial Officer (now Chief Executive Officer) in the United States District Court for the Eastern District of Michigan, Southern Division, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5, promulgated thereunder, based on alleged false and/or misleading statements or omissions regarding the Company and its business, and seeking class certification, unspecified damages plus interest and attorney and expert witness fees, and other costs on behalf of a purported class consisting of all persons and entities (subject to specified exceptions) that purchased or otherwise acquired Credit Acceptance common stock from November 1, 2019 through August 28, 2020.

On May 28, 2021, the court issued an opinion and order appointing lead plaintiffs and lead counsel.

On July 22, 2021, the lead plaintiffs filed an amended complaint asserting similar violations, seeking similar relief, and expanding the putative class to include all persons and entities (subject to specified exceptions) that purchased or otherwise acquired Credit Acceptance common stock from May 4, 2018 through August 28, 2020.

On June 14, 2022, the Company reached an agreement in principle to settle this putative class action.

The agreement in principle contemplated an aggregate cash payment by the Company of $ 12.0 million, all of which was recognized during the second quarter of 2022, to settle claims brought on behalf of all persons and entities that purchased or otherwise acquired Credit Acceptance common stock from May 4, 2018 through August 28, 2020.

On August 24, 2022, the parties executed and filed with the court a definitive stipulation and agreement of settlement, referred to herein as the settlement agreement, which was consistent with the agreement in principle and provides for a full release of all claims against all defendants, including the Company and its officers.

The settlement agreement provides that the defendants expressly deny any liability, wrongdoing, or responsibility.

On October 17, 2022, the Company wired the $ 12.0 million payment to a settlement administrator as provided for in the settlement agreement.

On December 12, 2022, the court issued an opinion and order granting lead plaintiffs’ motion for final approval of the settlement and plan of allocation.

On December 16, 2022, the court entered a final order and judgment consistent with the settlement agreement, including dismissal with prejudice of all claims asserted against the Company and its officers.

Regulatory Matter Resolved during 2021

On December 4, 2014, we received a civil investigative demand from the Office of the Attorney General of the Commonwealth of Massachusetts relating to the origination and collection of non-prime auto loans in Massachusetts.

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On September 1, 2021, we entered into a settlement agreement with the Office of the Attorney General, reflecting the parties’ agreement to settle and fully resolve the claims asserted against us.

We agreed to make a payment in the total amount of $27.2 million to an independent trust for purposes of making payments to provide relief for eligible Massachusetts consumers, paying costs of implementation of the agreement and paying the Attorney General’s costs of investigation, and to pay up to $95,000 to cover costs and expenses incurred by an independent trustee for management of the independent trust.

We made a payment in the total amount of $ 27.2 million to an independent trust for purposes of making payments to provide relief for eligible Massachusetts consumers, paying costs of implementation of the agreement and paying the Attorney General’s costs of investigation, and to pay up to $ 95,000 to cover costs and expenses incurred by an independent trustee for management of the independent trust.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONCLUDED)

On August 14, 2017, we received a subpoena from the Attorney General of the State of Mississippi, relating to the origination and collection of non-prime auto loans in the state of Mississippi.

The Company cooperated with the inquiry.

On April 23, 2019, the Attorney General of the State of Mississippi, on behalf of the State of Mississippi, filed a complaint in the Chancery Court of the First Judicial District of Hinds County, Mississippi, alleging that the Company engaged in unfair and deceptive trade practices in subprime auto lending, loan servicing, vehicle repossession and debt collection in the State of Mississippi in violation of the Mississippi Consumer Protection Act.

On December 15, 2021, the Company announced its settlement of litigation with the Mississippi Attorney General.

As part of the settlement, the Company made a charitable donation of $125,000, paid $325,000 to the State of Mississippi, inclusive of attorney’s fees and expenses, and provided certain assurances relating to, among other things, continued compliance with laws applicable to indirect auto finance operations in Mississippi and disclosures to consumers purchasing an optional vehicle service contract.

The Attorney General agreed to dismiss the litigation, and Credit Acceptance made no admission of liability or wrongdoing as part of the settlement.

Lease Commitments

We lease office space and office equipment.

We lease office equipment and, until December 31, 2022, we also leased office space.

We expect that, in the normal course of business, leases will be renewed or replaced by other leases.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data