CREDIT ACCEPTANCE CORP 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included in Item 8 - Financial Statements and Supplementary Data, of our 2022 Annual Report on Form 10-K, as well as Part I - Item 1 - Financial Statements, of this Quarterly Report on Form 10-Q, which is incorporated herein by reference. Overview We offer financing programs that enable automobile dealers to sell vehicles to consumers, regardless of their credit history. Our financing programs are offered through a nationwide network of automobile dealers who benefit from sales of vehicles to consumers who otherwise could not obtain financing; from repeat and referral sales generated by these same customers; and from sales to customers responding to advertisements for our financing programs, but who actually end up qualifying for traditional financing. For the three months ended September 30, 2023, consolidated net income was $70.8 million, or $5.43 per diluted share, compared to consolidated net income of $86.8 million, or $6.49 per diluted share, for the same period in 2022, primarily due to increases in interest expense and operating expenses and a decrease in other income. Our results for the three months ended September 30, 2023 included: • 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%, compared to a decrease in forecasted collection rates during the third quarter of 2022 that decreased forecasted net cash flows from our Loan portfolio by $85.4 million, or 0.9%. • Forecasted profitability for Consumer Loans assigned in 2020 through 2022 that was lower than our estimates at September 30, 2022, due to a decline in forecasted collection rates since the third quarter of 2022 and slower forecasted net cash flow timing during 2023, primarily as a result of a decrease in Consumer Loan prepayments to below-average levels. • Growth in Consumer Loan assignment volume, as unit and dollar volumes grew 13.0% and 10.5%, respectively, as compared to the third quarter of 2022. The average balance of our Loan portfolio for the third quarter of 2023 increased 5.9% as compared to the third quarter of 2022. • An increase in the initial spread on Consumer Loan assignments to 21.4% on Consumer Loans assigned in the third quarter of 2023 compared to 20.2% on Consumer Loans assigned in the third quarter of 2022. • An increase in our average cost of debt, which was primarily a result of higher interest rates on recently-completed or extended secured financings and the repayment of older secured financings with lower interest rates. For the nine months ended September 30, 2023, consolidated net income was $192.5 million, or $14.73 per diluted share, compared to consolidated net income of $408.5 million, or $29.74 per diluted share, for the same period in 2022, primarily due to increases in provision for credit losses on forecast changes and interest expense. Our results for the nine months ended September 30, 2023 included: • 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%, compared to a decrease in forecasted collection rates during the first nine months of 2022 that decreased forecasted net cash flows from our Loan portfolio by $18.6 million, or 0.2%. The $149.3 million decrease in forecasted net cash flows for the first nine months of 2023 included the impact of 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%. • Forecasted profitability for Consumer Loans assigned in 2020 through 2022 that was lower than our estimates at September 30, 2022, due to a decline in forecasted collection rates since the third quarter of 2022 and slower forecasted net cash flow timing during 2023, primarily as a result of a decrease in Consumer Loan prepayments to below-average levels. • Growth in Consumer Loan assignment volume, as unit and dollar volumes grew 16.2% and 12.4%, respectively, as compared to the first nine months of 2022. The average balance of our Loan portfolio for the first nine months of 2023 increased 3.7% as compared to the first nine months of 2022. • An increase in the initial spread on Consumer Loan assignments to 21.2% on Consumer Loans assigned in the first nine months of 2023 compared to 19.8% on Consumer Loans assigned in the first nine months of 2022. • An increase in our average cost of debt, which was primarily a result of higher interest rates on recently-completed or extended secured financings and the repayment of older secured financings with lower interest rates. 45 Table of Contents Critical Success Factors Critical success factors include our ability to accurately forecast Consumer Loan performance, access capital on acceptable terms, and maintain or grow Consumer Loan volume at the level and on the terms that we anticipate, with the objective to maximize economic profit over the long term. Economic profit is a non-GAAP financial measure we use to evaluate our financial results and determine profit-sharing for team members. We also use economic profit as a framework to evaluate business decisions and strategies. Economic profit measures how efficiently we utilize our total capital, both debt and equity, and is a function of the return on capital in excess of the cost of capital and the amount of capital invested in the business. Consumer Loan Metrics At the time a Consumer Loan is submitted to us for assignment, we forecast future expected cash flows from the Consumer Loan. Based on the amount and timing of these forecasts and expected expense levels, an advance or one-time purchase payment is made to the related Dealer at a price designed to maximize economic profit. We use a statistical model to estimate the expected collection rate for each Consumer Loan at the time of assignment. We continue to evaluate the expected collection rate of each Consumer Loan subsequent to assignment. Our evaluation becomes more accurate as the Consumer Loans age, as we use actual performance data in our forecast. By comparing our current expected collection rate for each Consumer Loan with the rate we projected at the time of assignment, we are able to assess the accuracy of our initial forecast. The following table compares our forecast of Consumer Loan collection rates as of September 30, 2023, with the forecasts as of June 30, 2023, as of December 31, 2022, and at the time of assignment, segmented by year of assignment: Forecasted Collection Percentage as of (1) Current Forecast Variance from Consumer Loan Assignment Year September 30, 2023 June 30, 2023 December 31, 2022 Initial Forecast June 30, 2023 December 31, 2022 Initial Forecast 2014 71.7 % 71.7 % 71.7 % 71.8 % 0.0 % 0.0 % -0.1 % 2015 65.2 % 65.2 % 65.2 % 67.7 % 0.0 % 0.0 % -2.5 % 2016 63.8 % 63.8 % 63.8 % 65.4 % 0.0 % 0.0 % -1.6 % 2017 64.7 % 64.7 % 64.7 % 64.0 % 0.0 % 0.0 % 0.7 % 2018 65.5 % 65.4 % 65.2 % 63.6 % 0.1 % 0.3 % 1.9 % 2019 66.8 % 66.8 % 66.6 % 64.0 % 0.0 % 0.2 % 2.8 % 2020 67.5 % 67.8 % 67.8 % 63.4 % -0.3 % -0.3 % 4.1 % 2021 64.9 % 65.5 % 66.2 % 66.3 % -0.6 % -1.3 % -1.4 % 2022 63.5 % 64.3 % 66.3 % 67.5 % -0.8 % -2.8 % -4.0 % 2023 (2) 67.6 % 67.5 % — 67.6 % 0.1 % — 0.0 % (1) Represents the total forecasted collections we expect to collect on the Consumer Loans as a percentage of the repayments that we were contractually owed on the Consumer Loans at the time of assignment. Contractual repayments include both principal and interest. Forecasted collection rates are negatively impacted by canceled Consumer Loans as the contractual amount owed is not removed from the denominator for purposes of computing forecasted collection rates in the table. (2) The forecasted collection rate for 2023 Consumer Loans as of September 30, 2023 includes both Consumer Loans that were in our portfolio as of June 30, 2023 and Consumer Loans assigned during the most recent quarter. The following table provides forecasted collection rates for each of these segments. Forecasted Collection Percentage as of Current Forecast Variance from 2023 Consumer Loan Assignment Period September 30, 2023 June 30, 2023 Initial Forecast June 30, 2023 Initial Forecast January 1, 2023 through June 30, 2023 67.6 % 67.5 % 67.5 % 0.1 % 0.1 % July 1, 2023 through September 30, 2023 67.7 % — 67.7 % — 0.0 % 46 Table of Contents Consumer Loans assigned in 2018 through 2020 have yielded forecasted collection results significantly better than our initial estimates, while Consumer Loans assigned in 2015, 2016, 2021, and 2022 have yielded forecasted collection results significantly worse than our initial estimates. For all other assignment years presented, actual results have been close to our initial estimates. For the three months ended September 30, 2023, forecasted collection rates declined for Consumer Loans assigned in 2020 through 2022 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, 2023, forecasted collection rates improved for Consumer Loans assigned in 2018 and 2019, declined for Consumer Loans assigned in 2020 through 2022, and were generally consistent with expectations at the start of the period for all other assignment years presented. The changes in forecasted collection rates for the three and nine months ended September 30, 2023 and 2022 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 2023 2022 2023 2022 Dealer Loans $ (40.3) $ (37.3) $ (89.3) $ (17.4) Purchased Loans (29.1) (48.1) (60.0) (1.2) Total $ (69.4) $ (85.4) $ (149.3) $ (18.6) % change from forecast at beginning of period -0.7 % -0.9 % -1.7 % -0.2 % During the second quarter of 2023, we adjusted our methodology for forecasting the amount and timing of future net cash flows from our Loan portfolio through the utilization of more recent Consumer Loan performance and Consumer Loan prepayment data. During the first half of 2023, we experienced a decrease in Consumer Loan prepayments to below-average levels and, as a result, slowed our forecasted net cash flow timing. The below-average levels of Consumer Loan prepayments continued through the third quarter of 2023. Historically, Consumer Loan prepayments have been lower in periods with less availability of consumer credit. Changes in the amount and timing of forecasted net cash flows are recognized in the period of change through provision for credit losses. The implementation of the adjustment to our forecasting methodology during the second quarter of 2023 reduced forecasted net cash flows by $44.5 million, or 0.5%, and increased provision for credit losses by $71.3 million. 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, 2023, the cumulative change to our forecast of future net cash flows from our Loan portfolio has been an increase of $70.8 million, or 0.8%. Forecasting collection rates accurately is challenging, so we have designed our business model to produce acceptable levels of profitability, even if Loan performance is less than forecasted. 47 Table of Contents The following table presents information on the average Consumer Loan assignment for each of the last 10 years: Average Consumer Loan Assignment Year Consumer Loan (1) Advance (2) Initial Loan Term (in months) 2014 $ 15,692 $ 7,492 47 2015 16,354 7,272 50 2016 18,218 7,976 53 2017 20,230 8,746 55 2018 22,158 9,635 57 2019 23,139 10,174 57 2020 24,262 10,656 59 2021 25,632 11,790 59 2022 27,242 12,924 60 2023 (3) 26,991 12,512 61 (1) Represents the repayments that we were contractually owed on Consumer Loans at the time of assignment, which include both principal and interest. (2) Represents advances paid to Dealers on Consumer Loans assigned under our Portfolio Program and one-time payments made to Dealers to purchase Consumer Loans assigned under our Purchase Program. Payments of Dealer Holdback, and accelerated Dealer Holdback are not included. (3) The averages for 2023 Consumer Loans include both Consumer Loans that were in our portfolio as of June 30, 2023 and Consumer Loans assigned during the most recent quarter. The following table provides averages for each of these segments: Average 2023 Consumer Loan Assignment Period Consumer Loan Advance Initial Loan Term (in months) January 1, 2023 through June 30, 2023 $ 26,912 $ 12,488 61 July 1, 2023 through September 30, 2023 27,157 12,564 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, even if collection rates are less than we initially forecast. The following table presents forecasted Consumer Loan collection rates, advance rates, the spread (the forecasted collection rate less the advance rate), and the percentage of the forecasted collections that had been realized as of September 30, 2023, as well as the forecasted collection rates and spread at the time of assignment. All amounts, unless otherwise noted, are presented as a percentage of the initial balance of the Consumer Loan (principal + interest). The table includes both Dealer Loans and Purchased Loans. Forecasted Collection % as of Spread % as of Consumer Loan Assignment Year September 30, 2023 Initial Forecast Advance % (1) September 30, 2023 Initial Forecast % of Forecast Realized (2) 2014 71.7 % 71.8 % 47.7 % 24.0 % 24.1 % 99.7 % 2015 65.2 % 67.7 % 44.5 % 20.7 % 23.2 % 99.4 % 2016 63.8 % 65.4 % 43.8 % 20.0 % 21.6 % 99.0 % 2017 64.7 % 64.0 % 43.2 % 21.5 % 20.8 % 98.5 % 2018 65.5 % 63.6 % 43.5 % 22.0 % 20.1 % 96.1 % 2019 66.8 % 64.0 % 44.0 % 22.8 % 20.0 % 90.8 % 2020 67.5 % 63.4 % 43.9 % 23.6 % 19.5 % 80.9 % 2021 64.9 % 66.3 % 46.0 % 18.9 % 20.3 % 64.7 % 2022 63.5 % 67.5 % 47.4 % 16.1 % 20.1 % 37.2 % 2023 (3) 67.6 % 67.6 % 46.4 % 21.2 % 21.2 % 10.5 % (1) Represents advances paid to Dealers on Consumer Loans assigned under our Portfolio Program and one-time payments made to Dealers to purchase Consumer Loans assigned under our Purchase Program as a percentage of the initial balance of the Consumer Loans. Payments of Dealer Holdback and accelerated Dealer Holdback are not included. (2) Presented as a percentage of total forecasted collections. 48 Table of Contents (3) The forecasted collection rate, advance rate and spread for 2023 Consumer Loans as of September 30, 2023 include both Consumer Loans that were in our portfolio as of June 30, 2023 and Consumer Loans assigned during the most recent quarter. The following table provides forecasted collection rates, advance rates, and spreads for each of these segments: Forecasted Collection % as of Spread % as of 2023 Consumer Loan Assignment Period September 30, 2023 Initial Forecast Advance % September 30, 2023 Initial Forecast January 1, 2023 through June 30, 2023 67.6 % 67.5 % 46.4 % 21.2 % 21.1 % July 1, 2023 through September 30, 2023 67.7 % 67.7 % 46.3 % 21.4 % 21.4 % The risk of a material change in our forecasted collection rate declines as the Consumer Loans age. For 2019 and prior Consumer Loan assignments, the risk of a material forecast variance is modest, as we have currently realized in excess of 90% of the expected collections. Conversely, the forecasted collection rates for more recent Consumer Loan assignments are less certain as a significant portion of our forecast has not been realized. The spread between the forecasted collection rate as of September 30, 2023 and the advance rate ranges from 16.1% to 24.0%, on an annual basis, for Consumer Loans assigned over the last 10 years. The spreads with respect to 2019 and 2020 Consumer Loans have been positively impacted by Consumer Loan performance, which has exceeded our initial estimates by a greater margin than the other years presented. The spread with respect to 2022 Consumer Loans has been negatively impacted by Consumer Loan performance, which has been lower than our initial estimates by a greater margin than the other years presented. The higher spread for 2023 Consumer Loans relative to 2022 Consumer Loans as of September 30, 2023 is primarily due to the performance of the 2022 Consumer Loans. Additionally, 2023 Consumer Loans had a higher initial spread primarily due to a decrease in the advance rate. The following table compares our forecast of Consumer Loan collection rates as of September 30, 2023 with the forecasts at the time of assignment, for Dealer Loans and Purchased Loans separately: Dealer Loans Purchased Loans Forecasted Collection Percentage as of (1) Forecasted Collection Percentage as of (1) Consumer Loan Assignment Year September 30, 2023 Initial Forecast Variance September 30, 2023 Initial Forecast Variance 2014 71.6 % 71.9 % -0.3 % 72.5 % 70.9 % 1.6 % 2015 64.6 % 67.5 % -2.9 % 68.9 % 68.5 % 0.4 % 2016 63.0 % 65.1 % -2.1 % 66.1 % 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 66.5 % 63.9 % 2.6 % 67.5 % 64.2 % 3.3 % 2020 67.4 % 63.3 % 4.1 % 67.8 % 63.6 % 4.2 % 2021 64.6 % 66.3 % -1.7 % 65.4 % 66.3 % -0.9 % 2022 62.9 % 67.3 % -4.4 % 65.0 % 68.0 % -3.0 % 2023 66.7 % 66.9 % -0.2 % 69.9 % 69.2 % 0.7 % (1) The forecasted collection rates presented for Dealer Loans and Purchased Loans reflect the Consumer Loan classification at the time of assignment. The forecasted collection rates represent the total forecasted collections we expect to collect on the Consumer Loans as a percentage of the repayments that we were contractually owed on the Consumer Loans at the time of assignment. Contractual repayments include both principal and interest. Forecasted collection rates are negatively impacted by canceled Consumer Loans as the contractual amount owed is not removed from the denominator for purposes of computing forecasted collection rates in the table. 49 Table of Contents The following table presents forecasted Consumer Loan collection rates, advance rates, and the spread (the forecasted collection rate less the advance rate) as of September 30, 2023 for Dealer Loans and Purchased Loans separately. All amounts are presented as a percentage of the initial balance of the Consumer Loan (principal + interest). Dealer Loans Purchased Loans Consumer Loan Assignment Year Forecasted Collection % (1) Advance % (1)(2) Spread % Forecasted Collection % (1) Advance % (1)(2) Spread % 2014 71.6 % 47.2 % 24.4 % 72.5 % 51.8 % 20.7 % 2015 64.6 % 43.4 % 21.2 % 68.9 % 50.2 % 18.7 % 2016 63.0 % 42.1 % 20.9 % 66.1 % 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 66.5 % 43.1 % 23.4 % 67.5 % 45.6 % 21.9 % 2020 67.4 % 43.0 % 24.4 % 67.8 % 45.5 % 22.3 % 2021 64.6 % 45.1 % 19.5 % 65.4 % 47.7 % 17.7 % 2022 62.9 % 46.4 % 16.5 % 65.0 % 50.1 % 14.9 % 2023 66.7 % 45.0 % 21.7 % 69.9 % 49.8 % 20.1 % (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, 2023 on 2023 Dealer Loans was 21.7%, as compared to a spread of 16.5% on 2022 Dealer Loans. The increase was primarily as a result of Consumer Loan performance, as the performance of 2022 Dealer Loans has been significantly lower than our initial estimates. Additionally, 2023 Dealer Loans had a higher initial spread, due to the advance rate decreasing by a greater margin than the initial forecast. The spread as of September 30, 2023 on 2023 Purchased Loans was 20.1%, as compared to a spread of 14.9% on 2022 Purchased Loans. The increase was primarily as a result of Consumer Loan performance, as the performance of 2022 Purchased Loans has been significantly lower than our initial estimates, while the performance of 2023 Purchased Loans has exceeded our initial estimates. Additionally, 2023 Purchased Loans had a higher initial spread, due to a higher initial forecast and a lower advance rate. Access to Capital Our strategy for accessing capital on acceptable terms needed to maintain and grow the business is to: (1) maintain consistent financial performance; (2) maintain modest financial leverage; and (3) maintain multiple funding sources. Our funded debt to equity ratio was 2.9 to 1 as of September 30, 2023. We currently utilize the following primary forms of debt financing: (1) our revolving secured line of credit facility; (2) Warehouse facilities; (3) Term ABS financings; and (4) senior notes. 50 Table of Contents 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, 2022 -22.1 % -10.5 % June 30, 2022 5.1 % 22.0 % September 30, 2022 29.3 % 32.1 % December 31, 2022 25.6 % 26.2 % March 31, 2023 22.8 % 18.6 % June 30, 2023 12.8 % 8.3 % September 30, 2023 13.0 % 10.5 % (1) Represents advances paid to Dealers on Consumer Loans assigned under our Portfolio Program and one-time payments made to Dealers to purchase Consumer Loans assigned under our Purchase Program. 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 13.0% and 10.5%, respectively, during the third quarter of 2023 as the number of active Dealers grew 14.9% and the average unit volume per active Dealer decreased 1.2%. Dollar volume increased less than unit volume during the third quarter of 2023 due to a decrease in the average advance paid, due to decreases in the average advance rate and the average size of Consumer Loans assigned. Unit volume for the third quarter of 2023 was 5.8% less than unit volume for the third quarter of 2019, which was the highest third quarter unit volume in our history. Unit volume for the 28-day period ended October 28, 2023 grew 27.5% and declined 0.9% compared to the same periods in 2022 and 2019, respectively. We believe the improvement in unit volume growth rates from the third quarter of 2023 to October 2023 was likely due to an improvement in the competitive environment. 51 Table of Contents 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, 2023 2022 % Change 2023 2022 % Change Consumer Loan unit volume 81,299 71,937 13.0 % 253,847 218,393 16.2 % Active Dealers (1) 9,818 8,547 14.9 % 13,008 10,880 19.6 % Average volume per active Dealer 8.3 8.4 -1.2 % 19.5 20.1 -3.0 % Consumer Loan unit volume from Dealers active both periods 59,788 59,592 0.3 % 208,731 198,910 4.9 % Dealers active both periods 5,920 5,920 — 8,553 8,553 — Average volume per Dealer active both periods 10.1 10.1 0.3 % 24.4 23.3 4.9 % Consumer Loan unit volume from Dealers not active both periods 21,511 12,345 74.2 % 45,116 19,483 131.6 % Dealers not active both periods 3,898 2,627 48.4 % 4,455 2,327 91.4 % Average volume per Dealer not active both periods 5.5 4.7 17.0 % 10.1 8.4 20.2 % (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, 2023 2022 % Change 2023 2022 % Change Consumer Loan unit volume from new active Dealers 3,926 2,522 55.7 % 29,005 17,653 64.3 % New active Dealers (1) 983 674 45.8 % 3,095 2,044 51.4 % Average volume per new active Dealer 4.0 3.7 8.1 % 9.4 8.6 9.3 % Attrition (2) -17.2 % -13.4 % -8.9 % -8.2 % (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, 2022 72.7 % 27.3 % 68.6 % 31.4 % June 30, 2022 74.0 % 26.0 % 70.4 % 29.6 % September 30, 2022 74.3 % 25.7 % 70.5 % 29.5 % December 31, 2022 73.1 % 26.9 % 69.6 % 30.4 % March 31, 2023 72.1 % 27.9 % 68.1 % 31.9 % June 30, 2023 72.4 % 27.6 % 68.6 % 31.4 % September 30, 2023 74.8 % 25.2 % 71.7 % 28.3 % (1) Represents advances paid to Dealers on Consumer Loans assigned under our Portfolio Program and one-time payments made to Dealers to purchase Consumer Loans assigned under our Purchase Program. Payments of Dealer Holdback and accelerated Dealer Holdback are not included. As of September 30, 2023 and December 31, 2022, the net Dealer Loans receivable balance was 66.6% and 64.7% , respectively, of the total net Loans receivable balance. 52 Table of Contents 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. We do not believe the GAAP methodology we employ (known as CECL) provides sufficient transparency into the economics of our business due to its asymmetry requiring us to recognize a significant provision for credit losses expense at the time of assignment for contractual net cash flows we never expect to realize and to recognize in subsequent periods finance charge revenue that is significantly in excess of our expected yields. For additional information, see Note 3 and Note 6 to the consolidated financial statements contained in Part I - Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference. Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022 The following is a discussion of our results of operations and income statement data on a consolidated basis. (Dollars in millions, except per share data) For the Three Months Ended September 30, 2023 2022 $ Change % Change Revenue: Finance charges $ 441.7 $ 420.6 $ 21.1 5.0 % Premiums earned 20.8 16.4 4.4 26.8 % Other income 16.1 23.3 (7.2) -30.9 % Total revenue 478.6 460.3 18.3 4.0 % Costs and expenses: Salaries and wages 66.7 66.9 (0.2) -0.3 % General and administrative 21.3 16.6 4.7 28.3 % Sales and marketing 22.5 19.7 2.8 14.2 % Total operating expenses 110.5 103.2 7.3 7.1 % Provision for credit losses on forecast changes 106.3 96.9 9.4 9.7 % Provision for credit losses on new Consumer Loan assignments 78.3 83.4 (5.1) -6.1 % Total provision for credit losses 184.6 180.3 4.3 2.4 % Interest 70.5 41.8 28.7 68.7 % Provision for claims 16.5 12.9 3.6 27.9 % Total costs and expenses 382.1 338.2 43.9 13.0 % Income before provision for income taxes 96.5 122.1 (25.6) -21.0 % Provision for income taxes 25.7 35.3 (9.6) -27.2 % Net income $ 70.8 $ 86.8 $ (16.0) -18.4 % Net income per share: Basic $ 5.47 $ 6.53 $ (1.06) -16.2 % Diluted $ 5.43 $ 6.49 $ (1.06) -16.3 % Weighted average shares outstanding: Basic 12,933,377 13,293,224 (359,847) -2.7 % Diluted 13,039,638 13,364,160 (324,522) -2.4 % 53 Table of Contents Finance Charges. The increase of $21.1 million, or 5.0%, 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, 2023 2022 Change Average net Loans receivable balance $ 6,690.8 $ 6,316.6 $ 374.2 Average yield on our Loan portfolio 26.4 % 26.6 % -0.2 % The following table summarizes the impact each component had on the overall increase in finance charges for the three months ended September 30, 2023: (In millions) Year over Year Change Impact on finance charges: For the Three Months Ended September 30, 2023 Due to an increase in the average net Loans receivable balance $ 24.9 Due to a decrease in the average yield (3.8) Total increase in finance charges $ 21.1 The increase in the average net Loans receivable balance was primarily due to the dollar volume of new Consumer Loan assignments exceeding the principal collected on Loans receivable. Premiums Earned. The increase of $4.4 million, or 26.8%, 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. Other Income. The decrease of $7.2 million, or 30.9%, was primarily due to: • A $5.9 million decrease in ancillary product profit sharing income primarily due to increases in average claim rates and volume of claims on Guaranteed Asset Protection (“GAP”) contracts. • A $4.6 million decrease in remarketing fee income for fees charged to dealers related to the repossession and remarketing of vehicles. Remarketing fee income for the three months ended September 30, 2022 included $4.5 million of fees charged to dealers for repossession activity that occurred in August 2020 through June 2022. • A $3.4 million increase in interest income due to increases in benchmark interest rates and the average restricted cash and cash equivalents balance. Operating Expenses. The increase of $7.3 million, or 7.1%, was primarily due to: • An increase in general and administrative expense of $4.7 million, or 28.3%, primarily due to an increase in technology systems expenses. • An increase in sales and marketing expense of $2.8 million, or 14.2%, primarily due to investments in our business to enhance our sales and marketing strategy and an increase in the size of our sales force. Provision for Credit Losses . The increase of $4.3 million, or 2.4%, was due to an increase in provision for credit losses on forecast changes, partially offset by a decrease in provision for credit losses on new Consumer Loan assignments. We recognize provision for credit losses on new Consumer Loan assignments for contractual net cash flows that are not expected to be realized at the time of assignment. We also recognize provision for credit losses on forecast changes in the amount and timing of expected future net cash flows subsequent to assignment. The following table summarizes the provision for credit losses for each of these components: (In millions) For the Three Months Ended September 30, Provision for Credit Losses 2023 2022 Change Forecast changes $ 106.3 $ 96.9 $ 9.4 New Consumer Loan assignments 78.3 83.4 (5.1) Total $ 184.6 $ 180.3 $ 4.3 The increase in provision for credit losses related to forecast changes was primarily due to slower net cash flow timing during the third quarter of 2023 compared to the third quarter of 2022. During the third quarter of 2023, we decreased our 54 Table of Contents estimate of future net cash flows by $69.4 million, or 0.7%, to reflect a decline in forecasted collection rates during the period and slowed our forecasted net cash flow timing to reflect a decrease in Consumer Loan prepayments to below-average levels. Historically, Consumer Loan prepayments have been lower in periods with less availability of consumer credit. During the third quarter of 2022, we reduced our estimate of future net cash flows by $85.4 million, or 0.9%, to reflect a decline in Consumer Loan performance during the period. The decrease in provision for credit losses related to new Consumer Loan assignments was due to a 16.9% decrease in the average provision per Consumer Loan assignment, partially offset by a 13.0% increase in Consumer Loan assignment unit volume. The decrease in the average provision per Consumer Loan assignment was primarily due to a decrease in the average advance rate for 2023 Consumer Loans. Interest. The increase in interest expense of $28.7 million, or 68.7%, was primarily due to an increase in our average cost of debt, which was primarily a result of higher interest rates on recently-completed or extended secured financings and the repayment of older secured financings with lower interest rates, as follows: (Dollars in millions) For the Three Months Ended September 30, 2023 2022 Change Interest expense $ 70.5 $ 41.8 $ 28.7 Average outstanding debt principal balance (1) 4,855.9 4,728.5 127.4 Average cost of debt 5.8 % 3.5 % 2.3 % (1) Includes the unamortized debt discount and excludes deferred debt issuance costs. Provision for Claims. The increase in provision for claims of $3.6 million, or 27.9%, was due to increases in the size of our reinsurance portfolio and the average claim paid per reinsured vehicle service contract. Provision for Income Taxes . For the three months ended September 30, 2023, the effective income tax rate decreased to 26.6% from 28.9% for the same period in 2022. The decrease was primarily due to a greater impact of state and local tax law changes recorded in the prior period. For additional information, see Note 11 to the consolidated financial statements contained in Part I - Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference. 55 Table of Contents Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022 The following is a discussion of our results of operations and income statement data on a consolidated basis. (Dollars in millions, except per share data) For the Nine Months Ended September 30, 2023 2022 $ Change % Change Revenue: Finance charges $ 1,303.8 $ 1,270.3 $ 33.5 2.6 % Premiums earned 58.0 45.6 12.4 27.2 % Other income 48.5 57.5 (9.0) -15.7 % Total revenue 1,410.3 1,373.4 36.9 2.7 % Costs and expenses: Salaries and wages 214.1 196.7 17.4 8.8 % General and administrative 59.8 67.8 (8.0) -11.8 % Sales and marketing 70.9 57.9 13.0 22.5 % Total operating expenses 344.8 322.4 22.4 6.9 % Provision for credit losses on forecast changes 319.4 67.6 251.8 372.5 % Provision for credit losses on new Consumer Loan assignments 253.1 283.5 (30.4) -10.7 % Total provision for credit losses 572.5 351.1 221.4 63.1 % Interest 187.7 117.2 70.5 60.2 % Provision for claims 54.1 34.0 20.1 59.1 % Total costs and expenses 1,159.1 824.7 334.4 40.5 % Income before provision for income taxes 251.2 548.7 (297.5) -54.2 % Provision for income taxes 58.7 140.2 (81.5) -58.1 % Net income $ 192.5 $ 408.5 $ (216.0) -52.9 % Net income per share: Basic $ 14.79 $ 29.90 $ (15.11) -50.5 % Diluted $ 14.73 $ 29.74 $ (15.01) -50.5 % Weighted average shares outstanding: Basic 13,013,344 13,662,178 (648,834) -4.7 % Diluted 13,068,998 13,737,871 (668,873) -4.9 % Finance Charges. The increase of $33.5 million, or 2.6%, was a result of an increase in the average net Loans receivable balance, partially offset by a decrease in the average yield on our Loan portfolio, as follows: (Dollars in millions) For the Nine Months Ended September 30, 2023 2022 Change Average net Loans receivable balance $ 6,547.8 $ 6,316.9 $ 230.9 Average yield on our Loan portfolio 26.5 % 26.8 % -0.3 % The following table summarizes the impact each component had on the overall increase in finance charges for the nine months ended September 30, 2023: (In millions) Year over Year Change Impact on finance charges: For the Nine Months Ended September 30, 2023 Due to an increase in the average net Loans receivable balance $ 46.4 Due to a decrease in the average yield (12.9) Total increase in finance charges $ 33.5 56 Table of Contents The increase in the average net Loans receivable balance was primarily due to the dollar volume of new Consumer Loan assignments exceeding the principal collected on Loans receivable. The decrease in the average yield of our Loan portfolio was primarily due to lower contractual yields on more recent Consumer Loan assignments. Premiums Earned. The increase of $12.4 million, or 27.2%, 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. Other Income. The decrease of $9.0 million, or 15.7%, was primarily due to: • A $16.9 million decrease in ancillary product profit sharing income primarily due to increases in average claim rates and volume of claims on GAP contracts. • A $2.8 million decrease in remarketing fee income for fees charged to dealers related to the repossession and remarketing of vehicles. Remarketing fee income for the nine months ended September 30, 2022 included $3.1 million of fees charged to dealers for repossession activity that occurred in August 2020 through December 2021. • An $11.4 million increase in interest income due to increases in benchmark interest rates and the average restricted cash and cash equivalents balance. Operating Expenses. The increase of $22.4 million, or 6.9%, was due to: • An increase in salaries and wages expense of $17.4 million, or 8.8%, primarily due to an increase in the number of team members in our engineering department as we are investing in our business to enhance our product and transform our technology systems to be more Dealer- and customer-focused and an increase in fringe benefits primarily due to higher medical claims. The impact of the increases in the number of team members and in fringe benefits was partially offset by a decrease in cash-based incentive compensation expense primarily due to a decline in Company performance measures. • An increase in sales and marketing expense of $13.0 million, or 22.5%, primarily due to investments in our business to enhance our sales and marketing strategy, an increase in the size of our sales force, and an increase in sales commissions related to growth in Consumer Loan assignment volume. • A decrease in general and administrative expense of $8.0 million, or 11.8%, primarily due to a decrease in legal expenses. Legal expenses for the nine months ended September 30, 2022 included a $12.0 million settlement to settle and fully resolve a previously disclosed putative class action lawsuit. Provision for Credit Losses . The increase of $221.4 million, or 63.1%, was due to an increase in provision for credit losses on forecast changes, partially offset by a decrease in provision for credit losses on new Consumer Loan assignments. We recognize provision for credit losses on new Consumer Loan assignments for contractual net cash flows that are not expected to be realized at the time of assignment. We also recognize provision for credit losses on forecast changes in the amount and timing of expected future net cash flows subsequent to assignment. The following table summarizes the provision for credit losses for each of these components: (In millions) For the Nine Months Ended September 30, Provision for Credit Losses 2023 2022 Change Forecast changes $ 319.4 $ 67.6 $ 251.8 New Consumer Loan assignments 253.1 283.5 (30.4) Total $ 572.5 $ 351.1 $ 221.4 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 2023 compared to the first nine months of 2022. 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 forecasted collection rates during the period and slowed our forecasted net cash flow timing to reflect a decrease in Consumer Loan prepayments to below-average levels. Historically, Consumer Loan prepayments have been lower in periods with less availability of consumer credit. The $149.3 million decrease in forecasted net cash flows for the first nine months of 2023 included the impact of 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 57 Table of Contents 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. During the first nine months of 2022, we decreased our estimate of future net cash flows by $18.6 million, or 0.2%, to reflect a decline in Consumer Loan performance during the period. The $18.6 million decrease in forecasted net cash flows for the first nine months of 2022 included the impact of forecasting methodology changes during the first quarter of 2022, which, upon implementation, increased our estimate of future net cash flows by $95.7 million and reduced our provision for credit losses by $70.6 million. The forecasting methodology changes included the removal of the COVID forecast adjustment from our estimate of future net cash flows and an enhancement to our methodology for forecasting the amount and timing of future net cash flows from our Loan portfolio through the utilization of more recent data and new forecast variables. For additional information, see Note 6 to the consolidated financial statements contained in Part I - Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference. The decrease in provision for credit losses related to new Consumer Loan assignments was due to a 23.2% decrease in the average provision per Consumer Loan assignment, partially offset by a 16.2% increase in Consumer Loan assignment unit volume. The decrease in the average provision per Consumer Loan assignment was primarily due to a decrease in the average advance rate for 2023 Consumer Loans. Interest. The increase in interest expense of $70.5 million, or 60.2%, was primarily due to an increase in our average cost of debt, which was primarily a result of higher interest rates on recently-completed or extended secured financings and the repayment of older secured financings with lower interest rates, as follows: (Dollars in millions) For the Nine Months Ended September 30, 2023 2022 Change Interest expense $ 187.7 $ 117.2 $ 70.5 Average outstanding debt principal balance (1) 4,742.0 4,712.7 29.3 Average cost of debt 5.3 % 3.3 % 2.0 % (1) Includes the unamortized debt discount and excludes deferred debt issuance costs. Provision for Claims. The increase in provision for claims of $20.1 million, or 59.1%, was primarily due to increases in the size of our reinsurance portfolio and the average claim paid per reinsured vehicle service contract. Provision for Income Taxes. For the nine months ended September 30, 2023, our effective income tax rate decreased to 23.4% from 25.6% for the nine months ended September 30, 2022. The decrease was primarily due to the impact of tax benefits related to our stock-based compensation plan and the settlement of an uncertain tax position for state income taxes during the second quarter of 2023, partially offset by an increase in non-deductible executive compensation expense. For additional information, see Note 11 to the consolidated financial statements contained in Part I - Item 1 of this Quarterly Report on Form 10-Q, which i s incorporated herein by reference. Properties The COVID-19 pandemic had a significant impact on our work environment, as the vast majority of our team members began working remotely. Because our remote operations and processes proved successful early on, we now pursue a “remote first” strategy to take advantage of the national talent pool and an increased rate of team member satisfaction. While remote work has become the primary experience for most of our team members, we do have team members that, due to their personal preference or the nature of their responsibilities, have continued to work primarily in one of our office properties. Additionally, we have various on-site meetings, events, and team building activities for which in-person attendance is encouraged. Therefore, we believe we will always have a need for some amount of office space. As a result of the “remote first” strategy, we have excess space in the two office buildings that we own in Southfield, Michigan. We are actively exploring options to reduce our office space, which could result in the sale of one or both of our buildings. As there is currently a significant amount of unoccupied office space in Southfield, we believe the market value of our buildings and improvements, land and land improvements, and office furniture and equipment is significantly less than their combined carrying value of $35.3 million. If we were to reclassify one or both of these buildings as held for sale, we would be required to record an impairment charge to reduce the carrying value of the buildings held for sale to their estimated market value less costs to sell. 58 Table of Contents 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, 2023. For information regarding these financings and the covenants included in the related documents, see Note 9 to the consolidated financial statements contained in Part I - Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference. On March 16, 2023, we completed a $400.0 million Term ABS financing, which was used to repay outstanding indebtedness and for general corporate purposes. The financing has an expected average annualized cost of 7.3% (including the initial purchasers’ fees and other costs), and it will revolve for 24 months, after which it will amortize based upon the cash flows on the underlying Loans. On April 28, 2023, we extended the date on which our $400.0 million Warehouse Facility II will cease to revolve from April 30, 2024 to April 30, 2026. The interest rate on borrowings under the facility has been increased from LIBOR plus 175 basis points to SOFR plus 230 basis points. On May 25, 2023, we completed a $400.0 million Term ABS financing, which was used to repay outstanding indebtedness and for general corporate purposes. The financing has an expected average annualized cost of 6.8% (including the initial purchasers’ fees and other costs), and it will revolve for 24 months, after which it will amortize based upon the cash flows on the underlying Loans. On June 22, 2023, we extended the maturity of our revolving secured line of credit facility from June 22, 2025 to June 22, 2026. Prior to this amendment, the amount of the facility was set to decrease by $25.0 million on June 22, 2023; however, this amendment increased the amount of the facility by $5.0 million, resulting in a net decrease of $20.0 million, from $410.0 million to $390.0 million. On August 4, 2023, we extended the date on which our $75.0 million Warehouse Facility VI will cease to revolve from September 30, 2024 to September 30, 2026. On August 24, 2023, we completed a $400.0 million Term ABS financing, which was used to repay outstanding indebtedness and for general corporate purposes. The financing has an expected average annualized cost of 7.3% (including the initial purchasers’ fees and other costs), and it will revolve for 24 months, after which it will amortize based upon the cash flows on the underlying Loans. On September 21, 2023, we extended the date on which our $200.0 million Warehouse Facility VIII will cease to revolve from September 1, 2024 to September 21, 2026. The interest rate on borrowings under the facility has been increased from SOFR plus 201.4 basis points to SOFR plus 225 basis points. Cash and cash equivalents were $3.1 million as of September 30, 2023 and $7.7 million as of December 31, 2022. As of September 30, 2023 and December 31, 2022, we had $1,281.9 million and $1,554.1 million, respectively, in unused and available lines of credit. Our total balance sheet indebtedness increased to $4,940.8 million as of September 30, 2023 from $4,590.7 million as of December 31, 2022. 59 Table of Contents A summary of our scheduled principal debt maturities as of September 30, 2023 is as follows: (In millions) Year Scheduled Principal Debt Maturities (1) Remainder of 2023 $ 337.9 2024 1,355.0 2025 1,672.4 2026 1,495.8 2027 101.1 Over five years 6.3 Total $ 4,968.5 (1) The principal maturities of certain financings are estimated based on forecasted collections. Based upon anticipated cash flows, management believes that cash flows from operations and our various financing alternatives will provide sufficient financing for debt maturities and for future operations. Our ability to borrow funds may be impacted by economic and financial market conditions. If the various financing alternatives were to become limited or unavailable to us, our operations and liquidity could be materially and adversely affected. Critical Accounting Estimates Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we review our accounting policies, assumptions, estimates, and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022 discusses several critical accounting estimates, which we believe involve a high degree of judgment and complexity. There have been no material changes to the estimates and assumptions associated with these accounting estimates from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2022, except as described below: During the second quarter of 2023, we adjusted our methodology for forecasting the amount and timing of future net cash flows from our Loan portfolio through the utilization of more recent Consumer Loan performance and Consumer Loan prepayment data. During the first half of 2023, we experienced a decrease in Consumer Loan prepayments to below-average levels and, as a result, slowed our forecasted net cash flow timing. The below-average levels of Consumer Loan prepayments continued through the third quarter of 2023. Historically, Consumer Loan prepayments have been lower in periods with less availability of consumer credit. Changes in the amount and timing of forecasted net cash flows are recognized in the period of change through provision for credit losses. The implementation of the adjustment to our forecasting methodology during the second quarter of 2023 reduced forecasted net cash flows by $44.5 million, or 0.5%, and increased provision for credit losses by $71.3 million. 60 Table of Contents Forward-Looking Statements We make forward-looking statements in this report and may make such statements in future filings with the Securities and Exchange Commission (“SEC”). We may also make forward-looking statements in our press releases or other public or shareholder communications. Our forward-looking statements are subject to risks and uncertainties and include information about our expectations and possible or assumed future results of operations. When we use any of the words “may,” “will,” “should,” “believe,” “expect,” “anticipate,” “assume,” “forecast,” “estimate,” “intend,” “plan,” “target,” or similar expressions, we are making forward-looking statements. We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all of our forward-looking statements. These forward-looking statements represent our outlook only as of the date of this report. While we believe that our forward-looking statements are reasonable, actual results could differ materially since the statements are based on our current expectations, which are subject to risks and uncertainties. Factors that might cause such a difference include, but are not limited to, the factors set forth in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022, other risk factors discussed herein or listed from time to time in our reports filed with the SEC, and the following: Industry, Operational and Macroeconomic Risks • Our inability to accurately forecast and estimate the amount and timing of future collections could have a material adverse effect on results of operations. • Due to competition from traditional financing sources and non-traditional lenders, we may not be able to compete successfully. • An outbreak of contagious disease, such as the COVID-19 pandemic, or other public health emergency could materially and adversely affect our business, financial condition, liquidity, and results of operations. • Reliance on third parties to administer our ancillary product offerings could adversely affect our business and financial results. • We are dependent on our senior management and the loss of any of these individuals or an inability to hire additional team members could adversely affect our ability to operate profitably. • Our reputation is a key asset to our business, and our business may be affected by how we are perceived in the marketplace. • The concentration of our dealers in several states could adversely affect us. • Reliance on our outsourced business functions could adversely affect our business. • Our ability to hire and retain foreign engineering personnel could be hindered by immigration restrictions. • We may be unable to execute our business strategy due to current economic conditions. • Adverse changes in economic conditions, the automobile or finance industries, or the non-prime consumer market could adversely affect our financial position, liquidity, and results of operations, the ability of key vendors that we depend on to supply us with services, and our ability to enter into future financing transactions. • Natural disasters, climate change, military conflicts, acts of war, terrorist attacks and threats, or the escalation of military activity in response to terrorist attacks or otherwise may negatively affect our business, financial condition, and results of operations. • Governmental or market responses to climate change and related environmental issues could have a material adverse effect on our business. • A small number of our shareholders have the ability to significantly influence matters requiring shareholder approval and such shareholders have interests which may conflict with the interests of our other security holders. Capital and Liquidity Risks • We may be unable to continue to access or renew funding sources and obtain capital needed to maintain and grow our business. • The terms of our debt limit how we conduct our business. • A violation of the terms of our asset-backed secured financings or revolving secured warehouse facilities could have a material adverse impact on our operations. • Our substantial debt could negatively impact our business, prevent us from satisfying our debt obligations, and adversely affect our financial condition. • We may not be able to generate sufficient cash flows to service our outstanding debt and fund operations and may be forced to take other actions to satisfy our obligations under such debt. • Interest rate fluctuations may adversely affect our borrowing costs, profitability, and liquidity. 61 Table of Contents • The phaseout of the London Interbank Offered Rate (“LIBOR”), or the replacement of LIBOR with a different reference rate, could result in a material adverse effect on our business. • Reduction in our credit rating could increase the cost of our funding from, and restrict our access to, the capital markets and adversely affect our liquidity, financial condition, and results of operations. • We may incur substantially more debt and other liabilities. This could exacerbate further the risks associated with our current debt levels. • The conditions of the U.S. and international capital markets may adversely affect lenders with which we have relationships, causing us to incur additional costs and reducing our sources of liquidity, which may adversely affect our financial position, liquidity, and results of operations. Technology and Cybersecurity Risks • Our dependence on technology could have a material adverse effect on our business. • Our use of electronic contracts could impact our ability to perfect our ownership or security interest in Consumer Loans. • Failure to properly safeguard confidential consumer and team member information could subject us to liability, decrease our profitability, and damage our reputation. Legal and Regulatory Risks • Litigation we are involved in from time to time may adversely affect our financial condition, results of operations, and cash flows. • Changes in tax laws and the resolution of uncertain income tax matters could have a material adverse effect on our results of operations and cash flows from operations. • The regulations to which we are or may become subject could result in a material adverse effect on our business. Other factors not currently anticipated by management may also materially and adversely affect our business, financial condition, and results of operations. We do not undertake, and expressly disclaim any obligation, to update or alter our statements whether as a result of new information, future events, or otherwise, except as required by applicable law. 62 Table of Contents ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Refer to our Annual Report on Form 10-K for the year ended December 31, 2022 for a complete discussion of our market risk. There have been no material changes to the market risk information included in our Annual Report on Form 10-K for the year ended December 31, 2022.