CREDIT ACCEPTANCE CORPORATION The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included in Item 8 - Financial Statements and Supplementary Data, of our 2021 Annual Report on Form 10-K, as well as Part I - Item 1 - Financial Statements, of this Form 10-Q, which is incorporated herein by reference.
Overview
We offer financing programs that enable automobile dealers to sell vehicles to consumers, regardless of their credit history. Our financing programs are offered through a nationwide network of automobile dealers who benefit from sales of vehicles to consumers who otherwise could not obtain financing; from repeat and referral sales generated by these same customers; and from sales to customers responding to advertisements for our financing programs, but who actually end up qualifying for traditional financing. For the three months endedMarch 31, 2022 , consolidated net income was$214.3 million , or$14.94 per diluted share, compared to consolidated net income of$202.1 million , or$11.82 per diluted share, for the same period in 2021 primarily due to a decrease in operating expenses, a decrease in interest expense and an increase in other income. Our results for the three months endedMarch 31, 2022 included: •An increase in forecasted collection rates for Consumer Loans assigned in 2016, 2017 and 2019 through 2021, which increased forecasted net cash flows from our loan portfolio by$110.2 million . •Forecasted profitability per Consumer Loan assignment that has significantly exceeded our initial estimates for Consumer Loans assigned in 2018 through 2021. •A decline in Consumer Loan assignment volume, as unit and dollar volumes declined 22.1% and 10.5%, respectively, as compared to the first quarter of 2021. •Stock repurchases of approximately 802,000 shares, which represented 5.7% of the shares outstanding at the beginning of the quarter.
Critical Success Factors
Critical success factors include our ability to accurately forecast Consumer
Loan performance, access capital on acceptable terms, and maintain or grow
Consumer Loan volume at the level and on the terms that we anticipate, with the
objective to maximize economic profit over the long term. Economic profit is a
non-GAAP financial measure we use to evaluate our financial results and
determine certain incentive compensation. We also use economic profit as a
framework to evaluate business decisions and strategies. Economic profit
measures how efficiently we utilize our total capital, both debt and equity, and
is a function of the return on capital in excess of the cost of capital and the
amount of capital invested in the business.
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Table of Contents Consumer Loan Metrics At the time a Consumer Loan is submitted to us for assignment, we forecast future expected cash flows from the Consumer Loan. Based on the amount and timing of these forecasts and expected expense levels, an advance or one-time purchase payment is made to the related Dealer at a price designed to maximize economic profit. We use a statistical model to estimate the expected collection rate for each Consumer Loan at the time of assignment. We continue to evaluate the expected collection rate of each Consumer Loan subsequent to assignment. Our evaluation becomes more accurate as the Consumer Loans age, as we use actual performance data in our forecast. By comparing our current expected collection rate for each Consumer Loan with the rate we projected at the time of assignment, we are able to assess the accuracy of our initial forecast. The following table compares our forecast of Consumer Loan collection rates as ofMarch 31, 2022 with the forecasts as ofDecember 31, 2021 and at the time of assignment, segmented by year of assignment: Current Forecast Variance Forecasted Collection Percentage as of (1) fromDecember 31 ,December 31 ,
Consumer Loan Assignment Year March 31, 2022 2021 Initial Forecast 2021 Initial Forecast
2013 73.4 % 73.4 % 72.0 % 0.0 % 1.4 %
2014 71.6 % 71.5 % 71.8 % 0.1 % -0.2 %
2015 65.2 % 65.1 % 67.7 % 0.1 % -2.5 %
2016 63.8 % 63.6 % 65.4 % 0.2 % -1.6 %
2017 64.6 % 64.4 % 64.0 % 0.2 % 0.6 %
2018 65.1 % 65.1 % 63.6 % 0.0 % 1.5 %
2019 66.8 % 66.5 % 64.0 % 0.3 % 2.8 %
2020 68.8 % 67.9 % 63.4 % 0.9 % 5.4 %
2021 68.4 % 66.5 % 66.3 % 1.9 % 2.1 %
2022 66.9 % - 67.2 % - -0.3 %
(1)Represents the total forecasted collections we expect to collect on the
Consumer Loans as a percentage of the repayments that we were contractually owed
on the Consumer Loans at the time of assignment. Contractual repayments include
both principal and interest. Forecasted collection rates are negatively impacted
by canceled Consumer Loans as the contractual amount owed is not removed from
the denominator for purposes of computing forecasted collection rates in the
table.
Consumer Loans assigned in 2013 and 2018 through 2021 have yielded forecasted
collection results significantly better than our initial estimates, while
Consumer Loans assigned in 2015 and 2016 have yielded forecasted collection
results significantly worse than our initial estimates. For all other assignment
years presented, actual results have been close to our initial estimates. For
the three months ended March 31, 2022 , forecasted collection rates improved for
Consumer Loans assigned in 2016, 2017 and 2019 through 2021 and were generally
consistent with expectations at the start of the period for all other assignment
years presented.
The changes in forecasted collection rates for the three months ended March 31,
2022 and 2021 impacted forecasted net cash flows (forecasted collections less
forecasted Dealer Holdback payments) as follows:
For the Three
Months Ended March
(In millions) 31,
Increase in Forecasted Net Cash Flows 2022 2021
Dealer Loans $ 33.9 $ 26.7
Purchased Loans 76.3 80.7
Total $ 110.2 $ 107.4
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The COVID-19 pandemic created conditions that increased the level of uncertainty
associated with our estimate of the amount and timing of future net cash flows
from our Loan portfolio. During the first quarter of 2020, we applied a
subjective adjustment to our forecasting model to reflect our best estimate of
the future impact of the COVID-19 pandemic on future net cash flows ("COVID
forecast adjustment"), which reduced our estimate of future net cash flows by
$162.2 million . We continued to apply the COVID forecast adjustment through the
end of 2021 as it continued to represent our best estimate. During the first
quarter of 2022, we determined that we had sufficient Consumer Loan performance
experience since the lapse of federal stimulus payments and enhanced
unemployment benefits to refine our estimate of future net cash flows.
Accordingly, during the first quarter of 2022, we removed the COVID forecast
adjustment and enhanced our methodology for forecasting the amount and timing of
future net cash flows from our Loan portfolio through the utilization of more
recent data and new forecast variables. Under CECL, changes in the amount and
timing of forecasted net cash flows are recorded as a provision for credit
losses in the period of change.
The removal of the COVID forecast adjustment and the implementation of the enhanced forecasting methodology impacted forecasted net cash flows and provision for credit losses as follows:
(In millions)
Increase / (Decrease) in
Forecasted Net Provision for
Forecasting Methodology Changes Cash Flows Credit Losses
Removal of COVID forecast adjustment $ 149.5 $ (118.5)
Implementation of enhanced forecasting methodology (53.8) 47.9
Total $ 95.7 $ (70.6) The following table presents information on the average Consumer Loan assignment for each of the last 10 years:
Average
Initial Loan Term
Consumer Loan Assignment Year Consumer Loan (1) Advance (2) (in months)
2013 $ 15,445 $ 7,344 47
2014 15,692 7,492 47
2015 16,354 7,272 50
2016 18,218 7,976 53
2017 20,230 8,746 55
2018 22,158 9,635 57
2019 23,139 10,174 57
2020 24,262 10,656 59
2021 25,632 11,790 59
2022 26,504 12,677 58
(1)Represents the repayments that we were contractually owed on Consumer Loans
at the time of assignment, which include both principal and interest.
(2)Represents advances paid to Dealers on Consumer Loans assigned under our
Portfolio Program and one-time payments made to Dealers to purchase Consumer
Loans assigned under our Purchase Program. Payments of Dealer Holdback and
accelerated Dealer Holdback are not included.
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Forecasting collection rates accurately at Loan inception is difficult. With this in mind, we establish advance rates that are intended to allow us to achieve acceptable levels of profitability, even if collection rates are less than we initially forecast. The following table presents forecasted Consumer Loan collection rates, advance rates, the spread (the forecasted collection rate less the advance rate), and the percentage of the forecasted collections that had been realized as ofMarch 31, 2022 . All amounts, unless otherwise noted, are presented as a percentage of the initial balance of the Consumer Loan (principal + interest). The table includes both Dealer Loans and Purchased Loans. As of March 31, 2022 Forecasted % of Forecast Consumer Loan Assignment Year Collection % Advance % (1) Spread % Realized (2) 2013 73.4 % 47.6 % 25.8 % 99.7 % 2014 71.6 % 47.7 % 23.9 % 99.4 % 2015 65.2 % 44.5 % 20.7 % 98.8 % 2016 63.8 % 43.8 % 20.0 % 97.8 % 2017 64.6 % 43.2 % 21.4 % 94.7 % 2018 65.1 % 43.5 % 21.6 % 86.4 % 2019 66.8 % 44.0 % 22.8 % 72.8 % 2020 68.8 % 43.9 % 24.9 % 53.3 % 2021 68.4 % 46.0 % 22.4 % 25.5 % 2022 66.9 % 47.8 % 19.1 % 2.4 % (1)Represents advances paid to Dealers on Consumer Loans assigned under our Portfolio Program and one-time payments made to Dealers to purchase Consumer Loans assigned under our Purchase Program as a percentage of the initial balance of the Consumer Loans. Payments of Dealer Holdback and accelerated Dealer Holdback are not included. (2)Presented as a percentage of total forecasted collections. The risk of a material change in our forecasted collection rate declines as the Consumer Loans age. For 2017 and prior Consumer Loan assignments, the risk of a material forecast variance is modest, as we have currently realized in excess of 90% of the expected collections. Conversely, the forecasted collection rates for more recent Consumer Loan assignments are less certain as a significant portion of our forecast has not been realized. The spread between the forecasted collection rate and the advance rate has ranged from 19.1% to 25.8%, on an annual basis, over the last 10 years. The spreads in 2019 through 2021 were positively impacted by Consumer Loan performance, which has exceeded our initial estimates by a greater margin than the other years presented. The decrease in the spread from 2021 to 2022 was primarily due to the performance of 2021 Consumer Loans, which has significantly exceeded our initial estimates, and a lower initial spread on 2022 Consumer Loans due to the advance rate increasing by a greater margin than the initial forecast. 45
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The following table compares our forecast of Consumer Loan collection rates as ofMarch 31, 2022 with the forecasts at the time of assignment, for Dealer Loans and Purchased Loans separately: Dealer Loans Purchased Loans Forecasted Collection Percentage as of Forecasted Collection Percentage as of (1) (1) Consumer Loan Assignment Initial Initial Year March 31, 2022 Forecast Variance March 31, 2022 Forecast Variance 2013 73.3 % 72.1 % 1.2 % 74.2 % 71.6 % 2.6 % 2014 71.5 % 71.9 % -0.4 % 72.4 % 70.9 % 1.5 % 2015 64.5 % 67.5 % -3.0 % 68.9 % 68.5 % 0.4 % 2016 63.0 % 65.1 % -2.1 % 66.1 % 66.5 % -0.4 % 2017 63.9 % 63.8 % 0.1 % 66.1 % 64.6 % 1.5 % 2018 64.6 % 63.6 % 1.0 % 66.3 % 63.5 % 2.8 % 2019 66.5 % 63.9 % 2.6 % 67.3 % 64.2 % 3.1 % 2020 68.6 % 63.3 % 5.3 % 69.0 % 63.6 % 5.4 % 2021 68.2 % 66.3 % 1.9 % 68.8 % 66.3 % 2.5 % 2022 66.9 % 67.2 % -0.3 % 67.2 % 67.3 % -0.1 % (1)The forecasted collection rates presented for Dealer Loans and Purchased Loans reflect the Consumer Loan classification at the time of assignment. The forecasted collection rates represent the total forecasted collections we expect to collect on the Consumer Loans as a percentage of the repayments that we were contractually owed on the Consumer Loans at the time of assignment. Contractual repayments include both principal and interest. Forecasted collection rates are negatively impacted by canceled Consumer Loans as the contractual amount owed is not removed from the denominator for purposes of computing forecasted collection rates in the table. The following table presents forecasted Consumer Loan collection rates, advance rates, and the spread (the forecasted collection rate less the advance rate) as ofMarch 31, 2022 for Dealer Loans and Purchased Loans separately. All amounts are presented as a percentage of the initial balance of the Consumer Loan (principal + interest). Dealer Loans Purchased Loans Consumer Loan Assignment Forecasted Advance % Forecasted Advance % Year Collection % (1) (1)(2) Spread % Collection % (1) (1)(2) Spread % 2013 73.3 % 47.2 % 26.1 % 74.2 % 51.5 % 22.7 % 2014 71.5 % 47.2 % 24.3 % 72.4 % 51.8 % 20.6 % 2015 64.5 % 43.4 % 21.1 % 68.9 % 50.2 % 18.7 % 2016 63.0 % 42.1 % 20.9 % 66.1 % 48.6 % 17.5 % 2017 63.9 % 42.1 % 21.8 % 66.1 % 45.8 % 20.3 % 2018 64.6 % 42.7 % 21.9 % 66.3 % 45.2 % 21.1 % 2019 66.5 % 43.1 % 23.4 % 67.3 % 45.6 % 21.7 % 2020 68.6 % 43.0 % 25.6 % 69.0 % 45.5 % 23.5 % 2021 68.2 % 45.1 % 23.1 % 68.8 % 47.7 % 21.1 % 2022 66.9 % 46.9 % 20.0 % 67.2 % 50.1 % 17.1 % (1)The forecasted collection rates and advance rates presented for Dealer Loans and Purchased Loans reflect the Consumer Loan classification at the time of assignment. (2)Represents advances paid to Dealers on Consumer Loans assigned under our Portfolio Program and one-time payments made to Dealers to purchase Consumer Loans assigned under our Purchase Program as a percentage of the initial balance of the Consumer Loans. Payments of Dealer Holdback and accelerated Dealer Holdback are not included.
Although the advance rate on Purchased Loans is higher as compared to the advance rate on Dealer Loans, Purchased Loans do not require us to pay Dealer Holdback.
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The spread on Dealer Loans decreased from 23.1% in 2021 to 20.0% in 2022 primarily as a result of the performance of the 2021 Consumer Loans in our Dealer Loan portfolio, which has significantly exceeded our initial estimates, and a lower initial spread on 2022 Consumer Loans in our Dealer Loan portfolio, due to the advance rate increasing by a greater margin than the initial forecast in our Dealer Loan portfolio. The spread on Purchased Loans decreased from 21.1% in 2021 to 17.1% in 2022 primarily as a result of the performance of the 2021 Consumer Loans in our Purchased Loan portfolio, which has significantly exceeded our initial estimates, and a lower initial spread on 2022 Consumer Loans in our Purchased Loan portfolio, due to the advance rate increasing by a greater margin than the initial forecast in our Purchased Loan portfolio.
Access to Capital
Our strategy for accessing capital on acceptable terms needed to maintain and grow the business is to: (1) maintain consistent financial performance; (2) maintain modest financial leverage; and (3) maintain multiple funding sources. Our funded debt to equity ratio was 2.9 to 1 as ofMarch 31, 2022 . We currently utilize the following primary forms of debt financing: (1) a revolving secured line of credit; (2) Warehouse facilities; (3) Term ABS financings; and (4) senior notes. Consumer Loan Volume The following table summarizes changes in Consumer Loan assignment volume in each of the last five quarters as compared to the same period in the previous year: Year over Year Percent Change Three Months Ended Unit Volume Dollar Volume (1) March 31, 2021 -7.5 % -2.2 % June 30, 2021 -28.7 % -20.5 % September 30, 2021 -29.4 % -17.9 % December 31, 2021 -22.6 % -12.7 % March 31, 2022 -22.1 % -10.5 %
(1)Represents advances paid to Dealers on Consumer Loans assigned under our Portfolio Program and one-time payments made to Dealers to purchase Consumer Loans assigned under our Purchase Program. Payments of Dealer Holdback and accelerated Dealer Holdback are not included.
Consumer Loan assignment volumes depend on a number of factors including (1) the overall demand for our financing programs, (2) the amount of capital available to fund new Loans, and (3) our assessment of the volume that our infrastructure can support. Our pricing strategy is intended to maximize the amount of economic profit we generate, within the confines of capital and infrastructure constraints. Unit and dollar volumes declined 22.1% and 10.5%, respectively, during the first quarter of 2022 as the number of active Dealers declined 9.4% and the average unit volume per active Dealer declined 14.6%. We believe the significant decline in unit volume over the last four quarters was primarily due to low dealer inventories and elevated used vehicle prices, which we believe are primarily due to the downstream impact of supply chain disruptions in the automotive industry. In addition, unit volume during the first four months of 2021 reflected the impact of the distribution of federal stimulus payments during that period. Unit volume forApril 2022 declined 13.8% compared to unit volume forApril 2021 , with the year-over-year change in unit volume improving significantly throughout the month. Should recent trends continue for the remainder of 2022, we expect that the year-over-year change in unit volume would improve fromApril 2022 , as the comparable 2021 period reflected a significant decline in unit volume. Dollar volume declined less than unit volume during the first quarter of 2022 due to an increase in the average advance paid per unit. This increase was the result of increases in both the average size of the Consumer Loans assigned, primarily due to an increase in the average vehicle selling price, and the average advance rate. 47
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The following table summarizes the changes in Consumer Loan unit volume and active Dealers:
For
the Three Months Ended
2022 2021 % Change
Consumer Loan unit volume 73,116 93,874 -22.1 %
Active Dealers (1) 8,275 9,129 -9.4 %
Average volume per active Dealer 8.8 10.3 -14.6 %
Consumer Loan unit volume from Dealers active both periods
62,243 80,681 -22.9 %
Dealers active both periods 6,204 6,204 -
Average volume per Dealer active both periods 10.0 13.0 -22.9 %
Consumer Loan unit volume from Dealers not active both periods
10,873 13,193 -17.6 %
Dealers not active both periods 2,071 2,925 -29.2 %
Average volume per Dealer not active both periods 5.3 4.5 17.8 %
(1)Active Dealers are Dealers who have received funding for at least one Consumer Loan during the period.
The following table provides additional information on the changes in Consumer Loan unit volume and active Dealers:
For
the Three Months Ended
2022 2021 % Change
Consumer Loan unit volume from new active Dealers 2,613 3,039 -14.0 %
New active Dealers (1) 688 706 -2.5 %
Average volume per new active Dealer 3.8 4.3 -11.6 %
Attrition (2) -14.1 % -15.2 %
(1)New active Dealers are Dealers who enrolled in our program and have received
funding for their first Loan from us during the period.
(2)Attrition is measured according to the following formula: decrease in
Consumer Loan unit volume from Dealers who have received funding for at least
one Loan during the comparable period of the prior year but did not receive
funding for any Loans during the current period divided by prior year comparable
period Consumer Loan unit volume.
The following table shows the percentage of Consumer Loans assigned to us as Dealer Loans and Purchased Loans for each of the last five quarters:
Unit Volume Dollar Volume (1)
Three Months Ended Dealer Loans Purchased Loans Dealer Loans Purchased Loans March 31, 2021 65.4 % 34.6 % 62.7 % 37.3 % June 30, 2021 66.9 % 33.1 % 64.0 % 36.0 % September 30, 2021 69.9 % 30.1 % 66.8 % 33.2 % December 31, 2021 71.8 % 28.2 % 68.0 % 32.0 % March 31, 2022 72.7 % 27.3 % 68.6 % 31.4 %
(1)Represents advances paid to Dealers on Consumer Loans assigned under our Portfolio Program and one-time payments made to Dealers to purchase Consumer Loans assigned under our Purchase Program. Payments of Dealer Holdback and accelerated Dealer Holdback are not included.
As of
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Table of Contents Results of Operations The net Loan income (finance charge revenue less provision for credit losses expense) that we recognize over the life of a Loan equals the cash we collect from the underlying Consumer Loan less the cash we pay to the Dealer. We believe the economics of our business are best exhibited by recognizing net Loan income on a level-yield basis over the life of the Loan based on expected future net cash flows. We do not believe the GAAP methodology we employ (known as CECL) provides sufficient transparency into the economics of our business due to its asymmetry requiring us to recognize a significant provision for credit losses expense at the time of assignment for contractual net cash flows we never expect to realize and to recognize in subsequent periods finance charge revenue that is significantly in excess of our expected yields. For additional information, see Note 3 and Note 6 to the consolidated financial statements contained in Part I - Item 1 of this Form 10-Q, which is incorporated herein by reference.
Three Months Ended
The following is a discussion of our results of operations and income statement data on a consolidated basis.
(Dollars in millions, except per share For the Three Months Ended
data) March 31,
2022 2021 $ Change % Change
Revenue:
Finance charges $ 424.1 $ 424.9 $ (0.8) -0.2 %
Premiums earned 13.8 14.4 (0.6) -4.2 %
Other income 17.8 11.7 6.1 52.1 %
Total revenue 455.7 451.0 4.7 1.0 %
Costs and expenses:
Salaries and wages (1) 64.4 49.3 15.1 30.6 %
General and administrative (1) 18.9 46.1 (27.2) -59.0 %
Sales and marketing (1) 19.2 17.2 2.0 11.6 %
Provision for credit losses 23.3 21.3 2.0 9.4 %
Interest 36.5 43.8 (7.3) -16.7 %
Provision for claims 8.9 9.0 (0.1) -1.1 %
Total costs and expenses 171.2 186.7 (15.5) -8.3 %
Income before provision for income taxes 284.5 264.3 20.2 7.6 %
Provision for income taxes 70.2 62.2 8.0 12.9 %
Net income $ 214.3 $ 202.1 $ 12.2 6.0 %
Net income per share:
Basic $ 15.02 $ 11.85 $ 3.17 26.8 %
Diluted $ 14.94 $ 11.82 $ 3.12 26.4 %
Weighted average shares outstanding:
Basic 14,268,518 17,060,944 (2,792,426) -16.4 %
Diluted 14,341,523 17,099,058 (2,757,535) -16.1 %
(1) Operating expenses$ 102.5 $ 112.6 $ (10.1) -9.0 % 49
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Finance Charges. The decrease of
(Dollars in millions) For the Three Months Ended
2022 2021 Change
Average net Loans receivable balance$ 6,306.7 $ 6,784.2 $ (477.5) Average yield on our Loan portfolio 26.9 % 25.1
% 1.8 %
The following table summarizes the impact each component had on the overall
increase in finance charges for the three months ended
Year over Year
(In millions) Change
For the Three Months
Impact on finance charges: Ended March 31, 2022
Due to an increase in the average yield $ 29.1
Due to a decrease in the average net Loans receivable balance
(29.9)
Total decrease in finance charges $
(0.8)
The decrease in the average net Loans receivable balance was primarily due to the principal collected on Loans receivable exceeding the dollar volume of new Consumer Loan assignments. The average yield on our Loan portfolio for the three months endedMarch 31, 2022 increased as compared to the same period in 2021 primarily due to the adoption of CECL onJanuary 1, 2020 , which requires us to recognize finance charges on new Consumer Loan assignments using effective interest rates based on contractual future net cash flows, which are significantly in excess of our expected yields. Other Income. The increase of$6.1 million , or 52.1%, was primarily due to an increase in ancillary product profit sharing income primarily due to a decrease in average claim rates on Guaranteed Asset Protection contracts. Operating Expenses. The decrease of$10.1 million , or 9.0%, was primarily due to: •A decrease in general and administrative expense of$27.2 million , or 59.0%, primarily due to a decrease in legal expenses. Legal expenses for the three months endedMarch 31, 2021 included a$27.2 million settlement with theCommonwealth of Massachusetts to settle and fully resolve the claims asserted against the Company. •An increase in salaries and wages expense of$15.1 million , or 30.6%, primarily due to: •An increase of$8.0 million in stock-based compensation expense, primarily related to stock options. FromDecember 2020 throughJune 2021 , we granted stock options, subject to shareholder approval of an amendment to our incentive compensation plan. Because stock-based awards subject to shareholder approval are not considered granted for accounting purposes until that approval is received, no stock-based compensation expense could be recognized with respect to those stock options until we received shareholder approval at the annual meeting onJuly 21, 2021 . •An increase of$7.1 million , excluding stock-based compensation expense and cash-based incentive compensation expense, primarily related to increases of$3.3 million for our servicing function and$3.1 million for our support function. 50
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Provision for Credit Losses. The increase of$2.0 million , or 9.4%, was due to a smaller reversal of provision for credit losses on forecast changes, partially offset by a decrease in provision for credit losses on new Consumer Loan assignments. We recognize provision for credit losses on new Consumer Loan assignments for contractual net cash flows that are not expected to be realized at the time of assignment. We also recognize provision for credit losses on forecast changes in the amount and timing of expected future net cash flows subsequent to assignment. The following table summarizes the provision for credit losses for each of these components: (In millions) For the Three Months Ended
Provision for Credit Losses 2022 2021 Change
New Consumer Loan assignments $ 102.6 $ 131.8 $ (29.2)
Forecast changes (79.3) (110.5) 31.2
Total $ 23.3 $ 21.3 $ 2.0
The smaller reversal of provision for credit losses related to forecast changes
was primarily due to changes in the estimated timing of future net cash flows.
During the first quarters of 2022 and 2021, we increased our estimate of future
net cash flows by $110.2 million and $107.4 million , respectively, to reflect
improvements in Consumer Loan performance during the periods. The results for
the first quarter of 2022 include the impact of forecasting methodology changes,
which increased our estimate of future net cash flows by $95.7 million and
reduced our provision for credit losses by $70.6 million . The forecasting
methodology changes included the removal of the COVID forecast adjustment from
our estimate of future net cash flows and an enhancement to our methodology for
forecasting the amount and timing of future net cash flows from our Loan
portfolio through the utilization of more recent data and new forecast
variables. For additional information, see Note 6 to the consolidated financial
statements contained in Part I - Item 1 of this Form 10-Q, which is incorporated
herein by reference.
The decrease in provision for credit losses related to new Consumer Loan assignments was due to a 22.1% decrease in Consumer Loan assignment unit volume, and a decrease in the average provision for credit losses per Consumer Loan assignment primarily due to a higher initial forecast on 2022 Consumer Loan assignments.
Interest. The decrease of
(Dollars in millions) For the Three Months Ended March 31,
2022 2021 Change
Interest expense $ 36.5 $ 43.8 $ (7.3)
Average outstanding debt principal balance (1) 4,614.3 4,730.7 (116.4)
Average cost of debt 3.2 % 3.7 % -0.5 %
(1)Includes the unamortized debt discount and excludes deferred debt issuance costs.
The decrease in our average cost of debt was primarily the result of lower interest rates on recently-completed secured financings.
Provision for Income Taxes. For the three months endedMarch 31, 2022 , the effective income tax rate increased to 24.7% from 23.5% for the three months endedMarch 31, 2021 . The increase was primarily due to an increase in non-deductible executive compensation expenses and higher effective tax rates in certain state tax jurisdictions. For additional information, see Note 11 to the consolidated financial statements contained in Part I - Item 1 of this Form 10-Q, which is incorporated herein by reference. 51
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Liquidity and Capital Resources
We need capital to maintain and grow our business. Our primary sources of capital are cash flows from operating activities, collections of Consumer Loans and borrowings under: (1) a revolving secured line of credit; (2) Warehouse facilities; (3) Term ABS financings; and (4) senior notes. There are various restrictive covenants to which we are subject under each financing arrangement and we were in compliance with those covenants as ofMarch 31, 2022 . For information regarding these financings and the covenants included in the related documents, see Note 9 to the consolidated financial statements contained in Part I - Item 1 of this Form 10-Q, which is incorporated herein by reference. Cash and cash equivalents as ofMarch 31, 2022 andDecember 31, 2021 was$17.6 million and$23.3 million , respectively. As ofMarch 31, 2022 andDecember 31, 2021 , we had$1,229.3 million and$1,532.4 million , respectively, in unused and available lines of credit. Our total balance sheet indebtedness as ofMarch 31, 2022 andDecember 31, 2021 was$4,739.0 million and$4,616.3 million , respectively. A summary of our scheduled principal debt maturities as ofMarch 31, 2022 is as follows: (In millions) Year Scheduled Principal Debt Maturities (1) Remainder of 2022 $ 1,287.9 2023 1,634.4 2024 1,308.4 2025 131.8 2026 400.0 Over five years - Total $ 4,762.5
(1)The principal maturities of certain financings are estimated based on forecasted collections.
Based upon anticipated cash flows, management believes that cash flows from operations and our various financing alternatives will provide sufficient financing for debt maturities and for future operations. Our ability to borrow funds may be impacted by economic and financial market conditions. If the various financing alternatives were to become limited or unavailable to us, our operations and liquidity could be materially and adversely affected.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we review our accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2021 discusses several critical accounting estimates, which we believe involve a high degree of judgment and complexity. There have been no material changes to the estimates and assumptions associated with these accounting estimates from those discussed in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , except as described below: The COVID-19 pandemic created conditions that increased the level of uncertainty associated with our estimate of the amount and timing of future net cash flows from our Loan portfolio. During the first quarter of 2020, we applied a subjective adjustment to our forecasting model to reflect our best estimate of the future impact of the COVID-19 pandemic on future net cash flows ("COVID forecast adjustment"), which reduced our estimate of future net cash flows by$162.2 million . We continued to apply the COVID forecast adjustment through the end of 2021 as it continued to represent our best estimate. During the first quarter of 2022, we determined that we had sufficient Consumer Loan performance experience since the lapse of federal stimulus payments and enhanced unemployment benefits to refine our estimate of future net cash flows. Accordingly, during the first quarter of 2022, we removed the COVID forecast adjustment and enhanced our methodology for forecasting the amount and timing of future net cash flows from our Loan portfolio through the utilization of more recent data and new forecast variables. Under CECL, changes in the amount and timing of forecasted net cash flows are recorded as a provision for credit losses in the period of change. 52
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The removal of the COVID forecast adjustment and the implementation of the enhanced forecasting methodology impacted forecasted net cash flows and provision for credit losses as follows:
(In millions)
Increase / (Decrease) in
Forecasted Net Provision for
Forecasting Methodology Changes Cash Flows Credit Losses
Removal of COVID forecast adjustment $ 149.5 $ (118.5)
Implementation of enhanced forecasting methodology (53.8) 47.9
Total $ 95.7 $ (70.6)
Forward-Looking Statements
We make forward-looking statements in this report and may make such statements
in future filings with the Securities and Exchange Commission ("SEC"). We may
also make forward-looking statements in our press releases or other public or
shareholder communications. Our forward-looking statements are subject to risks
and uncertainties and include information about our expectations and possible or
assumed future results of operations. When we use any of the words "may,"
"will," "should," "believe," "expect," "anticipate," "assume," "forecast,"
"estimate," "intend," "plan," "target" or similar expressions, we are making
forward-looking statements.
We claim the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995 for all of our
forward-looking statements. These forward-looking statements represent our
outlook only as of the date of this report. While we believe that our
forward-looking statements are reasonable, actual results could differ
materially since the statements are based on our current expectations, which are
subject to risks and uncertainties. Factors that might cause such a difference
include, but are not limited to, the factors set forth in Item 1A of our Form
10-K for the year ended December 31, 2021 and Item 1A in Part II of this report,
other risk factors discussed herein or listed from time to time in our reports
filed with the SEC and the following:
Industry, Operational and Macroeconomic Risks
•The outbreak of COVID-19 has adversely impacted our business, and the
continuance of this pandemic, or any future outbreak of any contagious diseases
or other public health emergency, could materially and adversely affect our
business, financial condition, liquidity and results of operations.
•Our inability to accurately forecast and estimate the amount and timing of
future collections could have a material adverse effect on results of
operations.
•Due to competition from traditional financing sources and non-traditional
lenders, we may not be able to compete successfully.
•Reliance on third parties to administer our ancillary product offerings could
adversely affect our business and financial results.
•We are dependent on our senior management and the loss of any of these
individuals or an inability to hire additional team members could adversely
affect our ability to operate profitably.
•Our reputation is a key asset to our business, and our business may be affected
by how we are perceived in the marketplace.
•The concentration of our dealers in several states could adversely affect us.
•Reliance on our outsourced business functions could adversely affect our
business.
•Our ability to hire and retain foreign information technology personnel could
be hindered by immigration restrictions.
•We may be unable to execute our business strategy due to current economic
conditions.
•Adverse changes in economic conditions, the automobile or finance industries,
or the non-prime consumer market could adversely affect our financial position,
liquidity and results of operations, the ability of key vendors that we depend
on to supply us with services, and our ability to enter into future financing
transactions.
•Natural disasters, climate change, acts of war, terrorist attacks and threats
or the escalation of military activity in response to these attacks or otherwise
may negatively affect our business, financial condition and results of
operations.
•Governmental or market responses to climate change and related environmental
issues could have a material adverse effect on our business.
•Consequences of the current conflict between Russia and Ukraine could have a
material adverse effect on our business, financial condition, liquidity and
results of operations.
•A small number of our shareholders have the ability to significantly influence
matters requiring shareholder approval and such shareholders have interests
which may conflict with the interests of our other security holders.
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Capital and Liquidity Risks
•We may be unable to continue to access or renew funding sources and obtain
capital needed to maintain and grow our business.
•The terms of our debt limit how we conduct our business.
•A violation of the terms of our asset-backed secured financing facilities or
revolving secured warehouse facilities could have a material adverse impact on
our operations.
•Our substantial debt could negatively impact our business, prevent us from
satisfying our debt obligations and adversely affect our financial condition.
•We may not be able to generate sufficient cash flows to service our outstanding
debt and fund operations and may be forced to take other actions to satisfy our
obligations under such debt.
•Interest rate fluctuations may adversely affect our borrowing costs,
profitability and liquidity.
•The phaseout of the London Interbank Offered Rate ("LIBOR"), or the replacement
of LIBOR with a different reference rate, could result in a material adverse
effect on our business.
•Reduction in our credit rating could increase the cost of our funding from, and
restrict our access to, the capital markets and adversely affect our liquidity,
financial condition and results of operations.
•We may incur substantially more debt and other liabilities. This could
exacerbate further the risks associated with our current debt levels.
•The conditions of the U.S. and international capital markets may adversely
affect lenders with which we have relationships, causing us to incur additional
costs and reducing our sources of liquidity, which may adversely affect our
financial position, liquidity and results of operations.
Information Technology and Cybersecurity Risks
•Our dependence on technology could have a material adverse effect on our
business.
•Our use of electronic contracts could impact our ability to perfect our
ownership or security interest in Consumer Loans.
•Failure to properly safeguard confidential consumer and team member information
could subject us to liability, decrease our profitability and damage our
reputation.
Legal and Regulatory Risks
•Litigation we are involved in from time to time may adversely affect our
financial condition, results of operations and cash flows.
•Changes in tax laws and the resolution of uncertain income tax matters could
have a material adverse effect on our results of operations and cash flows from
operations.
•The regulations to which we are or may become subject could result in a
material adverse effect on our business.
Other factors not currently anticipated by management may also materially and
adversely affect our business, financial condition and results of operations. We
do not undertake, and expressly disclaim any obligation, to update or alter our
statements whether as a result of new information, future events or otherwise,
except as required by applicable law.
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