Credit Acceptance Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unaudited results are compared with the corresponding 2022 periods. Credit Acceptance provides financing programs through auto dealers, primarily for consumers with impaired or limited credit histories.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $478.6 million | $460.3 million | $1,410.3 million | $1,373.4 million |
| Income before taxes | $96.5 million | $122.1 million | $251.2 million | $548.7 million |
| Net income | $70.8 million | $86.8 million | $192.5 million | $408.5 million |
| Diluted EPS | $5.43 | $6.49 | $14.73 | $29.74 |
| Interest expense | $70.5 million | $41.8 million | $187.7 million | $117.2 million |
| Credit-loss provision | $184.6 million | $180.3 million | $572.5 million | $351.1 million |
- Revenue increased 4.0% in Q3 and 2.7% year to date. Net income fell 18.4% and 52.9%, respectively. Approximate net margin was 14.8% in Q3 versus 18.9% a year earlier, and 13.6% year to date versus 29.7%.
- Q3 finance charges rose 5.0%, supported by a 5.9% increase in the average loan portfolio; the average yield eased to 26.4% from 26.6%. Nine-month finance charges rose 2.6%, while average yield declined to 26.5% from 26.8%.
- Credit-loss provision on forecast changes was $319.4 million year to date, versus $67.6 million in 2022. Provision on new assignments declined to $253.1 million from $283.5 million.
- Higher funding costs were a major pressure: average cost of debt was 5.8% in Q3 versus 3.5%, and 5.3% year to date versus 3.3%. Operating expenses rose 7.1% in Q3 and 6.9% year to date. Other income declined 30.9% in Q3 and 15.7% year to date; GAP-related profit sharing was lower as claims increased.
- Consumer Loan assignment volume grew 13.0% by units and 10.5% by dollars in Q3; year-to-date growth was 16.2% and 12.4%. The initial spread on Q3 assignments increased to 21.4% from 20.2% a year earlier.
- At September 30, total assets were $7,397.1 million; net loans were $6,780.5 million, with a $3,031.7 million allowance for credit losses. Total debt carrying amount was $4,940.8 million, up from $4,590.7 million at year-end 2022. Funded debt to equity was 2.9 to 1.
- Cash and cash equivalents were $3.1 million, with $435.1 million of restricted cash. Unused and available lines of credit were $1,281.9 million, down from $1,554.1 million at year-end. Operating cash flow was $892.6 million versus $951.9 million for the first nine months; investing activities used $1,071.9 million and financing activities provided $199.8 million.
Changes, outlook, and risks
- Management attributed the sharp year-to-date earnings decline mainly to higher provision for forecast changes and interest expense. Forecasted net cash flows fell $149.3 million, or 1.7%, in the first nine months, compared with a $18.6 million decline in 2022.
- A Q2 2023 forecasting-method update using more recent loan performance and prepayment data reduced estimated future net cash flows by $44.5 million and increased provision by $71.3 million. Prepayments remained below average through Q3; management associated lower prepayments historically with reduced consumer-credit availability.
- Forecast collection rates for 2022 assignments were 4.0 percentage points below initial expectations as of September 30; 2021 assignments were 1.4 points below. Management reported lower forecast profitability for 2020–2022 cohorts than estimated a year earlier. More recent loan forecasts remain less certain because less of their expected collections have been realized.
- No specific earnings or operating guidance is provided. Management said it expects operating cash flows and financing alternatives to be sufficient for debt maturities and operations, while cautioning that constrained access to financing could materially harm liquidity and operations.
- The company completed three $400 million Term ABS financings in 2023, each with an expected average annualized cost of 6.8%–7.3%, and extended several warehouse and revolving facilities. Debt maturities are concentrated in 2024–2026; scheduled principal maturities total $4,523.2 million across those years. The company reported compliance with financing covenants at quarter end.
- Material legal exposures include the joint CFPB/New York Attorney General lawsuit alleging deceptive and abusive practices, currently stayed pending a U.S. Supreme Court case; multistate investigations into origination, collections, and repossessions; a California inquiry into GAP products and refunds; and a Department of Justice investigation. The company cannot estimate reasonably possible losses from these matters and says an adverse outcome could materially affect results, liquidity, or financial position.
- Management is exploring reducing office space and potentially selling one or both Southfield buildings. It stated their market value may be significantly below the combined $35.3 million carrying value; a held-for-sale classification could trigger an impairment charge.
Investor verification priorities
- Track collection and prepayment performance, especially 2021–2022 loan cohorts, and the effect of any further forecast revisions on credit-loss provisions.
- Assess whether assignment growth and wider initial spreads can offset higher funding costs and weaker portfolio yields.
- Review available borrowing capacity, refinancing terms, 2024–2026 maturities, and the potential effects of asset-backed facility covenants or reduced capital-market access.
- Monitor developments and potential financial consequences in the CFPB/New York lawsuit and other regulatory investigations; loss estimates are not available in the filing.
- Follow any decision to sell office properties and whether an impairment is recorded.