Credit Acceptance Corporation — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Amounts are in U.S. dollars; financial statements are unaudited.
Business context
Credit Acceptance provides financing programs through a nationwide network of auto dealers, primarily for consumers with impaired or limited credit histories. It funds dealer advances under its Portfolio Program and purchases consumer loans under its Purchase Program. A total of 82.8% of loans assigned in the first half of 2023 were to consumers with FICO scores below 650 or no FICO score.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $477.9 million | $457.4 million | $931.7 million | $913.1 million |
| Net income | $22.2 million | $107.4 million | $121.7 million | $321.7 million |
| Diluted EPS | $1.69 | $7.94 | $9.30 | $23.10 |
| Provision for credit losses | $250.5 million | $147.5 million | $387.9 million | $170.8 million |
| Interest expense | $62.8 million | $38.9 million | $117.2 million | $75.4 million |
Q2 revenue increased 4.5%, while net income declined 79.3%. First-half revenue rose 2.0%, while net income declined 62.2%. Net margin, calculated as net income divided by revenue, was approximately 4.6% in Q2 2023 versus 23.5% in Q2 2022, and 13.1% in the first half versus 35.2% a year earlier.
- Revenue and operating costs: Q2 finance charges rose 3.6% to $441.0 million, supported by a larger average net loan balance; average portfolio yield edged down to 26.7% from 26.9%. First-half finance charges increased 1.5% to $862.1 million. Operating expenses were $117.0 million in Q2 and $234.3 million for the half. Lower legal expense versus the prior-year period partly offset higher compensation and sales and marketing costs.
- Credit performance: Forecast-change provisions were $168.8 million in Q2 and $213.1 million for the half, versus $50.0 million and a $29.3 million reversal, respectively, in 2022. Provisions on new assignments declined to $81.7 million in Q2 and $174.8 million for the half. Total allowance for credit losses was $2,989.3 million against $9,599.6 million of gross loans at June 30.
- Cash flow: First-half operating cash flow was $579.2 million, compared with $625.6 million in 2022. Investing activities used $712.0 million, primarily reflecting dealer advances and loan purchases; financing activities provided $127.1 million. Cash, cash equivalents and restricted cash totaled $412.0 million at period-end.
- Balance sheet and debt: Total assets were $7,205.5 million and shareholders’ equity was $1,747.0 million. Total debt carrying value was $4,746.6 million, up from $4,590.7 million at year-end 2022; funded debt to equity was 2.7:1. Cash and cash equivalents available without restriction were $3.2 million. The company reported $1,416.1 million of unused and available credit lines and compliance with applicable debt covenants.
Material changes and management commentary
- Management attributed the earnings decline primarily to higher credit-loss provisions on forecast changes and higher borrowing costs. Average cost of debt rose to 5.3% in Q2 from 3.2%; the first-half average was 5.0% versus 3.2%.
- Q2 loan assignment unit volume grew 12.8% and dollar volume 8.3% year over year; first-half unit and dollar volume rose 17.8% and 13.3%. The Q2 average initial spread was 21.2%, versus 20.0% a year earlier.
- Management cited below-average consumer prepayments and slower expected cash-flow timing. A second-quarter forecasting-methodology change, using more recent loan performance and prepayment data, reduced forecast net cash flows by $44.5 million and increased provision for credit losses by $71.3 million. Overall forecast net cash flows decreased $89.3 million in Q2 and $79.9 million in the first half.
- The company completed two $400 million Term ABS financings in March and May, with expected average annualized costs of 7.3% and 6.8%, respectively. It also extended a $400 million warehouse facility’s revolving period to 2026 and extended its revolving credit facility maturity to 2026.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management said it expects operating cash flows and available financing alternatives to be sufficient for debt maturities and future operations, while warning that restricted or unavailable financing could materially harm liquidity and operations. Scheduled principal maturities were $720.3 million for the remainder of 2023, $1,312.4 million in 2024, and $1,565.8 million in 2025; certain amounts are estimates based on forecast collections.
Key risks include the accuracy of loan collection forecasts, weaker consumer credit availability or loan performance, interest-rate and funding-market changes, substantial debt, and covenant compliance. The New York Attorney General and Consumer Financial Protection Bureau filed a lawsuit in January 2023 alleging deceptive or abusive conduct and other violations; the company moved to dismiss and intends to defend itself. The company cannot estimate a reasonably possible loss range. It also disclosed a California inquiry concerning GAP products and ongoing multistate investigations; outcomes and potential losses are not estimable. Management noted that the market value of its Southfield office properties may be below carrying value; a sale or held-for-sale reclassification could result in an impairment charge.
Important facts for investors to verify
- Whether recent collection and prepayment trends continue, especially for 2021–2022 loan vintages, and whether credit-loss forecasts require further revisions.
- Whether the $71.3 million provision impact of the forecasting-methodology change and the broader forecast deterioration are one-time or persist in subsequent periods.
- Funding costs, credit-line availability, debt maturities, and covenant headroom, particularly as new ABS financings carry higher costs.
- Developments and potential financial exposure in the NYAG/CFPB lawsuit and other regulatory inquiries; the filing provides no estimable loss range.
- Whether any office-property sale or reclassification leads to an impairment charge, and whether loan assignment growth converts into profitable realized collections.