Credit Acceptance Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are to Q1 2022 unless stated otherwise. Credit Acceptance provides auto financing through dealers, primarily to consumers with impaired or limited credit histories. The company reported one operating segment. Results are subject to seasonality, with peak loan assignments and collections generally in the first quarter.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $453.8 million | $455.7 million | Down 0.4% |
| Operating expenses | $117.3 million | $102.5 million | Up 14.4% |
| Provision for credit losses | $137.4 million | $23.3 million | Up $114.1 million |
| Interest expense | $54.4 million | $36.5 million | Up 49.0% |
| Income before taxes | $126.8 million | $284.5 million | Down 55.4% |
| Net income | $99.5 million | $214.3 million | Down 53.6% |
| Diluted EPS | $7.61 | $14.94 | Down 49.1% |
| Operating cash flow | $296.5 million | $376.1 million | Down $79.6 million |
Net margin, calculated as net income divided by revenue, was approximately 21.9%, versus 47.0% in Q1 2022. Finance charge revenue slipped 0.7% to $421.1 million; the average portfolio yield declined to 26.5% from 26.9%, partly offset by a larger average net loan balance. Premiums earned rose 26.1% to $17.4 million, while other income fell 14.0% to $15.3 million.
Portfolio, liquidity and debt
- Consumer Loan assignment volume increased 22.8% by units to 89,821 and 18.6% by dollar volume. Active dealers rose 18.1% to 9,775. The average advance rate declined, so dollar volume grew more slowly than unit volume.
- Net loans receivable were $6.50 billion at March 31, 2023, up from $6.30 billion at year-end; gross loans were $9.38 billion and the allowance for credit losses was $2.88 billion. The allowance was about 30.7% of gross loans, calculated from reported balances.
- Cash and cash equivalents were $8.1 million; restricted cash was $480.0 million. Management reported $1.44 billion of unused and available credit lines, subject to facility terms and collateral availability.
- Total debt carrying value increased to $4.72 billion from $4.59 billion at December 31, 2022. Funded debt to equity was 2.7 to 1. The company reported compliance with applicable debt covenants at quarter-end.
- Q1 investing cash outflow was $344.2 million and financing cash inflow was $118.1 million. Cash and restricted cash together increased $70.4 million to $488.1 million.
Material changes and management commentary
- Net income fell principally because credit-loss provision, interest expense and operating expenses rose. Credit-loss provision increased to $137.4 million from $23.3 million, including $44.3 million for forecast changes versus a $79.3 million reversal in Q1 2022.
- Management attributed the Q1 2023 forecast-change provision to slower net cash-flow timing, mainly from fewer consumer loan prepayments. Forecasted portfolio net cash flows nevertheless increased $9.4 million, or 0.1%, during the quarter; management described collection-rate forecasts as stable.
- Q1 2022 benefited from elevated loan performance and a one-time forecasting-methodology change that increased estimated future net cash flows by $95.7 million and reduced provision by $70.6 million. This complicates year-over-year comparison.
- Provision on new assignments declined to $93.1 million from $102.6 million, despite higher assignment volume; management cited a 26.1% decline in average provision per assignment, primarily due to lower average advance rates. Initial spread on Q1 2023 assignments was 21.0%, versus 19.4% a year earlier.
- Operating expenses increased mainly because of higher engineering headcount and investment in dealer- and customer-focused products and technology. Interest expense rose as the average cost of debt increased to 4.7% from 3.2%.
- Management stated that operating cash flows and financing alternatives are expected to be sufficient for debt maturities and future operations, while cautioning that reduced access to financing could materially harm liquidity. No specific earnings or volume guidance was provided.
Risks, contingencies and unusual items
- On January 4, 2023, the New York Attorney General and the Consumer Financial Protection Bureau filed suit alleging, among other matters, deceptive or abusive practices and securities-related violations. The company moved to dismiss on March 14 and intends to defend itself. It cannot estimate a reasonably possible loss or range; an adverse outcome could materially affect results, liquidity or financial position.
- The filing also describes California inquiries regarding GAP products, multistate investigations concerning origination, collection and repossession practices, and a Department of Justice inquiry. Outcomes and potential losses are not estimable from the filing.
- The company’s remote-first strategy has left excess office space. Management said the market value of its Southfield properties and related assets may be significantly below their $37.3 million carrying value; a held-for-sale classification could require an impairment charge.
- Debt maturities scheduled for the remainder of 2023 total $1.19 billion and for 2024 total $1.23 billion; some amounts are estimates based on forecast collections. The March 2023 $400 million Term ABS financing carries an expected average annualized cost of 7.3%. On April 28, the company extended Warehouse Facility II’s revolving period to April 2026, with its rate reset from LIBOR plus 175 basis points to SOFR plus 230 basis points.
- Key risks include forecasting collection performance in a predominantly non-prime portfolio, consumer and regulatory litigation, higher funding costs, substantial debt, funding-market access, and compliance with asset-backed financing covenants. Management reported no material changes to market-risk disclosures and no material changes to critical accounting estimates from the 2022 Form 10-K.
Key facts for investors to verify
- Whether the weaker collection and prepayment trends affecting recent loan vintages persist, and how they change credit-loss provisions and realized cash flows.
- Performance of 2022 assignments, whose current forecasted collection rate was 66.0% versus an initial 67.5%; newer vintages remain less seasoned and forecasts less certain.
- Progress and potential financial exposure from the CFPB/New York lawsuit and other state and federal investigations; the filing does not quantify potential losses.
- Refinancing and funding capacity against near-term maturities, rising borrowing costs, and the terms and collateral constraints of credit facilities.
- Whether any office-property sale or held-for-sale classification leads to an impairment charge.