Credit Acceptance Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Amounts are in millions of dollars unless stated otherwise. Credit Acceptance provides indirect auto financing through dealer programs, primarily to consumers with impaired or limited credit histories; 85.6% of nine-month 2022 assigned loan unit volume was to consumers with FICO scores below 650 or no score.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $460.3 | $470.1 | $1,373.4 | $1,392.8 |
| Provision for credit losses | $180.3 | $(8.3) | $351.1 | $(17.5) |
| Income before tax | $122.1 | $332.2 | $548.7 | $976.2 |
| Net income | $86.8 | $250.0 | $408.5 | $740.7 |
| Diluted EPS | $6.49 | $15.79 | $29.74 | $44.73 |
| Net margin, calculated | 18.9% | 53.2% | 29.7% | 53.2% |
Q3 revenue declined 2.1% and net income declined 65.3% year over year. For the first nine months, revenue fell 1.4% and net income fell 44.8%. Higher credit-loss provision was the principal earnings pressure; Q3 provision reflected a $96.9 million charge from forecast changes, versus an $83.8 million reversal in Q3 2021. Finance charges declined 4.9% in Q3 and 3.2% year to date, largely due to lower average net loan balances. Nine-month operating expenses increased 15.5%, while interest expense declined 6.7%.
Other income rose 84.9% in Q3 and 65.2% year to date, helped by ancillary-product profit sharing and remarketing fees. Q3 remarketing fees included $4.5 million related to repossession activity from August 2020 through June 2022. The nine-month effective tax rate was 25.6%, up from 24.1%; Q3 was 28.9%, up from 24.7%, partly reflecting enacted state and local tax changes.
Balance sheet, cash flow and funding
- At September 30, 2022, loans receivable were $9,186.4 gross, with a $2,874.8 allowance and $6,311.6 net. Total assets were $6,892.4 and shareholders’ equity was $1,589.2.
- Cash and cash equivalents were $10.7; restricted cash was $384.7. Management reported $1,171.1 of unused and available lines of credit, subject to facility and collateral limits.
- Total debt carrying value was $4,625.9, versus $4,616.3 at year-end 2021; funded debt to equity was 2.9 to 1. Debt included $188.9 on the revolving secured line, $3,634.1 secured financing, and $793.9 senior notes. The company reported compliance with applicable debt covenants.
- For the nine months, operating cash flow was $951.9; investing activities used $339.1 and financing activities used $651.6. The period-end cash and restricted cash total was $395.4, down from $434.2 at year-end 2021.
- Scheduled principal maturities were $315.2 for the remainder of 2022, $1,608.8 in 2023 and $1,293.8 in 2024. The company said it expected operating cash flows and financing alternatives to cover maturities and operations, while noting that reduced access to financing could materially harm liquidity.
Material changes and management commentary
- Q3 loan assignment unit and dollar volumes increased 29.3% and 32.1% year over year, respectively. Nine-month unit volume declined 0.4%, while dollar volume grew 11.5%. Management attributed the Q3 comparison partly to weak 2021 dealer inventories and elevated used-car prices.
- Despite Q3 volume growth, estimated future net cash flows on the loan portfolio declined $85.4 million, or 0.9%, during the quarter. For the nine months, they declined $18.6 million, or 0.2%. The 2022 portfolio’s forecast collection rate was 66.5%, compared with 67.4% at assignment.
- During Q1 2022, the company removed its COVID forecast adjustment and updated its forecasting methodology. Together, these changes increased estimated future net cash flows by $95.7 million and reduced credit-loss provision by $70.6 million.
- The company repurchased approximately 1.26 million shares for $679.2 million in the first nine months; 365,838 shares remained authorized for repurchase at quarter-end. The share count was down from 14.1 million at December 31, 2021 to 12.9 million at September 30, 2022.
- Management disclosed excess office space and said the combined carrying value of relevant Southfield property and office assets was $39.2 million, which it believed exceeded market value. A potential sale could require an impairment charge; no charge was reported here.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management identifies accurate loan-collection forecasting, access to capital, and maintaining loan assignment volume on acceptable terms as key success factors. Results are particularly sensitive to forecast assumptions because CECL accounting recognizes expected credit losses at assignment and later forecast revisions through provision expense.
Key risks include weaker consumer collections, economic and used-car market conditions, funding availability and borrowing costs, substantial debt, and regulatory or litigation outcomes. The company disclosed a California Attorney General inquiry concerning GAP products; a New York Attorney General investigation with a stated intent to litigate; a CFPB investigation; multistate attorney general investigations; and a Department of Justice inquiry. Loss exposure for these matters could not be reasonably estimated. A shareholder class-action settlement for $12.0 million was preliminarily approved by the court, with final approval still pending at filing; the company had recorded the probable loss in Q2 2022.
The company also identified Russia-Ukraine conflict-related uncertainty as a risk to economic conditions, consumer demand, portfolio performance and capital access. It reported no material change in market-risk disclosures and stated that disclosure controls were effective.
Most important facts for investors to verify
- Whether collections and forecasted credit performance on 2021–2022 loan vintages stabilize or weaken further, and the resulting provision impact.
- Whether Q3 assignment growth persists and translates into acceptable expected returns, given the lower 2022 forecast collection rate and spread.
- Facility availability, refinancing needs and debt maturities—particularly the 2023–2024 schedule—and sensitivity to higher interest rates.
- Final court approval and payment timing for the $12.0 million shareholder settlement, plus developments in the New York AG, CFPB and other investigations.
- Whether office-property plans result in a sale or impairment charge, and whether repurchases continue alongside liquidity and funding needs.