Credit Acceptance Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; comparisons are with the same 2020 periods unless noted. Credit Acceptance provides indirect auto financing through dealers, primarily to consumers with impaired or limited credit histories.
Financial performance and position
| Metric | Q3 2021 | Nine months 2021 |
|---|---|---|
| Total revenue | $470.1 million, up 10.2% | $1,392.8 million, up 14.0% |
| Net income | $250.0 million, up 3.3% | $740.7 million, up 190.8% |
| Diluted EPS | $15.79, up 16.4% | $44.73, up 215.7% |
| Net margin | 53.2%, versus 56.8% | 53.2%, versus 20.8% |
| Finance charges | $442.1 million, up 9.3% | $1,312.4 million, up 14.7% |
| Provision for credit losses | $8.3 million reversal, versus $29.8 million reversal | $17.5 million reversal, versus $464.3 million expense |
Management attributed higher finance charges principally to higher reported portfolio yields under CECL accounting, which recognizes interest using contractual cash flows and can produce yields above expected economic yields. Nine-month earnings growth also reflects improved loan performance and the prior-year credit-loss provision, including the 2020 COVID-related forecast adjustment. These comparisons are therefore affected substantially by credit-loss accounting and should not be read as equivalent changes in underlying loan economics.
- Quarterly costs and margins: Q3 operating expenses (salaries, general and administrative, and sales and marketing) rose 19.9% to $96.4 million. Salaries increased largely because of $14.7 million in stock-option compensation. Interest expense fell 15.0% to $39.8 million as the average cost of debt declined to 3.4% from 3.9%.
- Cash flow: Nine-month operating cash flow was $938.3 million; investing cash flow was positive $214.2 million; financing cash flow was negative $1,106.4 million. Financing outflows included $1,093.9 million of share repurchases. Cash and restricted cash totaled $442.3 million at September 30.
- Balance sheet and funding: Net loans receivable were $6.58 billion, with a $3.10 billion allowance for credit losses. Total assets were $7.20 billion and shareholders’ equity was $1.95 billion. Debt carrying value was $4.61 billion; funded debt to equity was 2.4:1. The company reported $1.52 billion of unused and available lines of credit and compliance with debt covenants.
Material changes and business trends
- Q3 consumer-loan assignment unit volume fell 29.4% and dollar volume fell 17.9%; nine-month unit and dollar volumes declined 21.1% and 13.1%. Fewer active dealers and lower volume per active dealer contributed. Management cited low dealer inventories and elevated used-vehicle prices, linked to automotive supply-chain disruptions.
- Despite weaker volume, estimated future net cash flows increased $82.3 million in Q3 and $294.2 million for the nine months, reflecting improved collection forecasts. Forecasted collections improved particularly for 2018–2021 vintages. Management cautioned that newer vintages remain less certain because much of their expected collections has not yet been realized.
- Average Q3 portfolio yield rose to 26.5% from 23.7%; for the nine months it rose to 25.8% from 22.7%. The filing says CECL adoption is a primary reason for the higher reported yield.
- Repurchased 2.28 million shares for $1.09 billion in the first nine months, including 1.29 million shares for $704.1 million in Q3. A new authorization for up to two million additional shares was approved September 28, 2021.
Outlook, risks, and unusual items
- The filing provides no numerical earnings or volume guidance. Management said anticipated operating cash flows and financing alternatives should provide sufficient funding for debt maturities and operations, while warning that reduced access to financing could materially harm liquidity and operations.
- Management continued to apply its $206.5 million COVID-related reduction to estimated future loan cash flows, initially recorded in Q1 2020. It said the pandemic increases uncertainty in forecasting collections.
- The company settled Massachusetts claims for $27.2 million, recognized as a loss in Q1 2021; the September 2021 agreement provides for payment to an independent trust and up to $95,000 in trustee costs. Other significant matters include a securities class action and investigations or proceedings involving the New York Attorney General, CFPB, Mississippi, Maryland/New Jersey and other states, the Department of Justice, and Massachusetts-related matters. The company said it could not estimate potential losses for several pending matters.
- After quarter-end, the revolving credit facility was increased from $340 million to $385 million and extended to June 2024; Warehouse Facility VI’s revolving period was extended; and a $250.1 million Term ABS financing was completed at an expected annualized cost of approximately 1.8%.
- Other notable expense item: $14.7 million of Q3 stock-option compensation followed shareholder approval of the compensation-plan amendment in July. The filing also identifies consumer-credit forecasting, funding access and cost, interest rates, regulation, litigation, and dealer/vehicle-market conditions as key risks.
Investor verification priorities
- Assess whether forecasted collection improvements and the unusually favorable nine-month credit-loss comparison persist as newer loan vintages season.
- Track loan assignment volume, active dealers, dealer inventory and used-vehicle pricing, and the spread between forecasted collections and advances.
- Review the cash-flow and capital impact of substantial repurchases alongside debt maturities, restricted cash, borrowing availability and covenant headroom.
- Monitor outcomes and potential financial effects of pending regulatory investigations and litigation; several exposures have no estimable loss range.
- Separate CECL-driven reported finance-charge yields and credit-loss reversals from underlying cash collections and expected loan economics.