Credit Acceptance Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet amounts are as of March 31, 2021. Unaudited. Dollar amounts are in millions unless noted.
Business context
Credit Acceptance provides financing programs through a nationwide dealer network, primarily for consumers with impaired or limited credit histories. It operates a single reportable segment. The company uses a Portfolio Program, in which it advances funds to dealers and may later pay dealer holdback, and a Purchase Program, in which it buys consumer loans. Seasonality typically makes first-quarter loan assignments and collections higher.
Financial results and position
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Total revenue | $451.0 | $389.1 |
| Finance charges | $424.9 | $361.9 |
| Provision for credit losses | $21.3 | $354.7 |
| Income (loss) before tax | $264.3 | $(112.8) |
| Net income (loss) | $202.1 | $(83.8) |
| Diluted earnings (loss) per share | $11.82 | $(4.61) |
| Net cash provided by operating activities | $325.2 | $231.3 |
- Revenue increased 15.9%; net income improved by $285.9. The main driver was a $333.4 decrease in credit-loss provision, reflecting a $110.5 reversal from improved portfolio forecasts in 2021 versus $196.8 of adverse forecast changes in 2020.
- Finance charges rose 17.4%, primarily as the average portfolio yield increased to 25.1% from 21.7%. Management cautions that CECL accounting boosts reported yield on loans assigned after January 1, 2020 because the effective rate uses contractual rather than expected cash flows.
- Operating expenses excluding credit-loss provision, interest, claims and debt-extinguishment loss totaled $112.6, up 42.4% from $79.1. General and administrative expense rose $31.1, including a $27.2 contingent-loss accrual related to the Massachusetts case.
- Q1 net margin was approximately 44.8% of revenue, compared with a net loss in the prior-year quarter; this comparison is heavily affected by the large credit-loss provision in Q1 2020.
- At quarter-end, loans receivable, net were $6,875.3, versus $6,787.9 at year-end; the allowance for credit losses was $3,282.7, versus $3,336.9. Total assets were $7,706.9 and shareholders’ equity was $2,369.8.
- Cash and cash equivalents were $45.7; restricted cash was $538.5. Debt carrying value was $4,716.0, including $3,914.6 of secured financing and $791.1 of senior notes. Unused and available lines of credit totaled $1,590.0. Funded debt to equity was 2.0:1; the company reported compliance with financing covenants.
- Q1 cash flows included $112.6 of net investing outflow and $24.6 of net financing outflow. The company repurchased 393,408 shares for $135.2.
Changes and operating trends
- Consumer Loan assignment volume declined 7.5% by units and 2.2% by dollar volume year over year. Active dealers fell 7.3%; average unit volume per active dealer was flat.
- Collections improved: year-over-year total collections grew 19.0% in Q1 2021, versus 9.1% in Q1 2020. Management attributed the Q1 improvement partly to additional federal stimulus payments.
- Forecasted net cash flows increased $107.4 in Q1 2021, with gains in both Dealer Loans ($26.7) and Purchased Loans ($80.7). The company continued to apply its COVID-related forecast adjustment established in 2020.
- Two Term ABS financings were completed in Q1: $100.0 in January and $500.0 in February; the latter had an expected annualized cost of approximately 1.4%. Warehouse Facility II and IV revolving periods were extended.
Outlook, risks and unusual items
- The filing provides no specific earnings or loan-volume guidance. Management said operating cash flows and financing alternatives were expected to be sufficient for debt maturities and operations, while warning that reduced access to funding could materially harm liquidity and operations.
- Management described continuing uncertainty from COVID-19, consumer behavior, economic conditions, stimulus and unemployment benefits. Loan performance and the timing and amount of collections remain key uncertainties; forecasts for newer loan vintages are less seasoned.
- Material legal matters include regulatory investigations by the New York Attorney General, the Consumer Financial Protection Bureau, and multiple state authorities, plus Mississippi and Massachusetts litigation. The Massachusetts settlement was agreed in principle on April 27, 2021; the company recorded a probable $27.2 loss in Q1. Loss estimates for several other matters were not estimable.
- Other stated risks include competition, dealer concentration, substantial debt and covenant restrictions, refinancing and interest-rate exposure, and the transition away from LIBOR.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether improved collections and forecast revisions persist, particularly as stimulus effects change and newer loan vintages season.
- The basis and sensitivity of CECL loan-loss forecasts, including the continued COVID-related adjustment and the difference between accounting yield and expected economic returns.
- The final terms, timing and financial impact of the Massachusetts settlement, and developments in other regulatory investigations and litigation.
- Availability and cost of warehouse, ABS and other funding; debt maturities, collateral requirements, covenant headroom and the effect of LIBOR replacement.
- Whether declining dealer counts and loan assignment volumes reverse, and how higher vehicle prices and longer loan terms affect credit risk and returns.