CACC

Credit Acceptance Corp. Q1 2011 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2011. Credit Acceptance Corporation operates as an indirect lender providing auto loans to consumers with impaired or limited credit histories through a nationwide network of "Dealer-Partners." The company utilizes two primary programs: the Portfolio Program (advancing funds to dealers) and the Purchase Program (buying loans outright). As of March 31, 2011, the Portfolio Program accounted for 92.9% of unit volume.

Key Financial Metrics

Margins: The effective tax rate for the quarter was 35.8%, down from 39.0% in the prior year. The average yield on the loan portfolio was 33.8%.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 19.6% year-over-year, driven primarily by an 18.8% increase in finance charges due to a larger loan portfolio ($208 million increase in average net loans receivable).
• Profitability: Net income rose 34.9% to $43.2 million. This growth was fueled by higher finance charges and a $2.6 million increase in other income (largely from GAP profit sharing), partially offset by higher provisions for credit losses and interest expense.
• Loan Volume: Consumer loan unit volume increased 36.7% year-over-year to 53,183 units. Active Dealer-Partners grew 18.3% to 2,775.
• Debt Structure: Total indebtedness increased significantly due to the issuance of $100 million in Senior Notes and increased borrowing to fund loan growth and a stock repurchase program.
• Stock Repurchase: The company completed a tender offer in Q1 2011, repurchasing 1.9 million shares for approximately $125 million.

Outlook, Risks, and Contingencies

• Capital Access: Management maintains a funded debt-to-equity ratio of 2.2:1 and relies on multiple funding sources, including a revolving line of credit, warehouse facilities, Term ABS financings, and Senior Notes. All debt covenants were met as of March 31, 2011.
• Credit Risk: The company's primary risk is the accuracy of forecasting future cash flows from consumer loans. While 2009 and 2010 vintages performed better than initial forecasts, 2006 and 2007 vintages underperformed. The provision for credit losses increased 38.7% to $8.9 million due to declines in forecasted cash flows for specific impaired loan pools.
• Legal and Regulatory: The company is subject to various customer claims and litigation regarding truth-in-lending and debt collection. Notably, the Missouri Attorney General issued a civil investigative demand in December 2010 regarding title transfer practices; the company is cooperating with the inquiry.
• Forward-Looking Risks: Risks include inability to access capital, adverse changes in economic conditions affecting the non-prime market, interest rate fluctuations, and potential violations of debt covenants.

Investor Verification Checklist

• Loan Portfolio Yield vs. Cost of Debt: Verify the sustainability of the spread between the 33.8% loan yield and the 7.0% average cost of debt as interest rates fluctuate.
• Credit Loss Forecasting: Review the specific loan pools driving the $8.9 million provision for credit losses to assess if underperformance is isolated or indicative of broader portfolio trends.
• Debt Maturities: Confirm the company's ability to refinance or repay the $54.5 million in debt maturing in the remainder of 2011 and $203.6 million in 2012.
• Regulatory Exposure: Monitor the outcome of the Missouri Attorney General investigation and any potential class action litigation settlements.
• Capital Allocation: Assess the impact of the $125 million stock repurchase on liquidity and future lending capacity.