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 endedSeptember 30, 2022 , consolidated net income was$86.8 million , or$6.49 per diluted share, compared to consolidated net income of$250.0 million , or$15.79 per diluted share, for the same period in 2021, primarily due to an increase in provision for credit losses and a decrease in finance charges. Our results for the three months endedSeptember 30, 2022 included: •A decrease in forecasted collection rates for Consumer Loans assigned in 2019 through 2022, which decreased forecasted net cash flows from our Loan portfolio by$85.4 million , or 0.9%. •Forecasted profitability per Consumer Loan assignment that has significantly exceeded our initial estimates for Consumer Loans assigned in 2018 through 2020. •Growth in Consumer Loan assignment volume, as unit and dollar volumes grew 29.3% and 32.1%, respectively, as compared to the third quarter of 2021. •Stock repurchases of approximately 54,000 shares, which represented 0.4% of the shares outstanding at the beginning of the quarter. For the nine months endedSeptember 30, 2022 , consolidated net income was$408.5 million , or$29.74 per diluted share, compared to consolidated net income of$740.7 million , or$44.73 per diluted share, for the same period in 2021, primarily due to an increase in provision for credit losses, an increase in operating expenses and a decrease in finance charges. Our results for the nine months endedSeptember 30, 2022 included: •A decrease in forecasted collection rates for Consumer Loans assigned in 2022 and an increase in forecasted collection rates for Consumer Loans assigned in 2014, 2016, 2017 and 2021, which decreased forecasted net cash flows from our Loan portfolio by$18.6 million , or 0.2%. •Forecasted profitability per Consumer Loan assignment that has significantly exceeded our initial estimates for Consumer Loans assigned in 2018 through 2020. •A decline in Consumer Loan assignment unit volume of 0.4%, while dollar volume grew 11.5%, as compared to the same period in 2021. •Stock repurchases of approximately 1.3 million shares, which represented 8.9% of the shares outstanding at the beginning of the year. •A$12.0 million expense in the second quarter of 2022, compared to a$27.2 million expense in the first quarter of 2021, related to previously-disclosed legal matters, and a$21.6 million increase in stock-based compensation expense primarily due to the retirement of our former Chief Executive Officer inMay 2021 and the timing of shareholder approval for 2020 and 2021 stock option grants.
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 ofSeptember 30, 2022 , with the forecasts as ofJune 30, 2022 , as ofDecember 31, 2021 and at the time of assignment, segmented by year of assignment: Forecasted Collection Percentage as of (1) Current Forecast Variance from Consumer Loan Assignment September 30, December 31, December 31, Year 2022 June 30, 2022 2021 Initial Forecast June 30, 2022 2021 Initial Forecast 2013 73.4 % 73.4 % 73.4 % 72.0 % 0.0 % 0.0 % 1.4 % 2014 71.7 % 71.7 % 71.5 % 71.8 % 0.0 % 0.2 % -0.1 % 2015 65.2 % 65.2 % 65.1 % 67.7 % 0.0 % 0.1 % -2.5 % 2016 63.8 % 63.8 % 63.6 % 65.4 % 0.0 % 0.2 % -1.6 % 2017 64.6 % 64.6 % 64.4 % 64.0 % 0.0 % 0.2 % 0.6 % 2018 65.1 % 65.1 % 65.1 % 63.6 % 0.0 % 0.0 % 1.5 % 2019 66.5 % 66.7 % 66.5 % 64.0 % -0.2 % 0.0 % 2.5 % 2020 67.9 % 68.4 % 67.9 % 63.4 % -0.5 % 0.0 % 4.5 % 2021 66.8 % 67.6 % 66.5 % 66.3 % -0.8 % 0.3 % 0.5 % 2022 (2) 66.5 % 67.1 % - 67.4 % -0.6 % - -0.9 % (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. (2)The forecasted collection rate for 2022 Consumer Loans as ofSeptember 30, 2022 includes both Consumer Loans that were in our portfolio as ofJune 30, 2022 and Consumer Loans assigned during the most recent quarter. The following table provides forecasted collection rates for each of these segments: Forecasted Collection Percentage as of Current Forecast Variance from
2022 Consumer Loan Assignment
Period September 30, 2022 June 30,
2022 Initial Forecast
66.3 % 67.1 % 67.6 % -0.8 % -1.3 %
July 1, 2022 through September 30, 2022 66.9 % - 67.1 % - -0.2 % Consumer Loans assigned in 2013 and 2018 through 2020 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 endedSeptember 30, 2022 , forecasted collection rates declined for Consumer Loans assigned in 2019 through 2022 and were generally consistent with expectations at the start of the period for all other assignment years presented. For the nine months endedSeptember 30, 2022 , forecasted collection rates improved for Consumer Loans assigned in 2014, 2016, 2017 and 2021, declined for Consumer Loans assigned in 2022, and were generally consistent with expectations at the start of the period for all other assignment years presented. 45
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The changes in forecasted collection rates for the three and nine months ended
For the Three Months Ended September For the Nine Months Ended September (In millions)
30, 30,
Increase (Decrease) in Forecasted
Net Cash Flows 2022 2021 2022 2021
Dealer Loans $ (37.3) $ 20.3 $ (17.4) $ 79.9
Purchased Loans (48.1) 62.0 (1.2) 214.3
Total $ (85.4) $ 82.3 $ (18.6) $ 294.2
Total realized collections for October 2022 were consistent with our
expectations at the start of the month. However, we have not yet completed our
analysis of the collection results to determine the impact on forecasted net
cash flows.
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 (3) 27,197 12,938 59
(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.
(3)The averages for 2022 Consumer Loans include both Consumer Loans that were in
our portfolio as of June 30, 2022 and Consumer Loans assigned during the most
recent quarter. The following table provides averages for each of these
segments:
Average
Initial Loan Term
2022 Consumer Loan Assignment Period Consumer Loan Advance (in months)
January 1, 2022 through June 30, 2022 $ 27,118 $ 12,995 59
July 1, 2022 through September 30, 2022 27,357 12,820 60
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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 ofSeptember 30, 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 September 30, 2022 Forecasted % of Forecast Consumer Loan Assignment Year Collection % Advance % (1) Spread % Realized (2) 2013 73.4 % 47.6 % 25.8 % 99.8 % 2014 71.7 % 47.7 % 24.0 % 99.5 % 2015 65.2 % 44.5 % 20.7 % 99.0 % 2016 63.8 % 43.8 % 20.0 % 98.4 % 2017 64.6 % 43.2 % 21.4 % 96.6 % 2018 65.1 % 43.5 % 21.6 % 91.1 % 2019 66.5 % 44.0 % 22.5 % 80.9 % 2020 67.9 % 43.9 % 24.0 % 65.1 % 2021 66.8 % 46.0 % 20.8 % 41.3 % 2022 (3) 66.5 % 47.6 % 18.9 % 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 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. (3)The forecasted collection rate, advance rate and spread for 2022 Consumer Loans as ofSeptember 30, 2022 include both Consumer Loans that were in our portfolio as ofJune 30, 2022 and Consumer Loans assigned during the most recent quarter. The following table provides forecasted collection rates, advance rates, and spreads for each of these segments: As of September
30, 2022
Forecasted
2022 Consumer Loan Assignment Period Collection % Advance % Spread %
January 1, 2022 through June 30, 2022 66.3 % 47.9 % 18.4 %
July 1, 2022 through September 30, 2022 66.9 % 46.9 % 20.0 %
The risk of a material change in our forecasted collection rate declines as the
Consumer Loans age. For 2018 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 18.9% to 25.8%, on an annual basis, over the last 10 years. The
spreads in 2019 and 2020 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 Consumer Loan performance, as the performance of 2021 Consumer Loans has
exceeded our initial estimates while the performance of 2022 Consumer Loans has
been lower than 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. The increase in the spread from the first six months of 2022
to the third quarter of 2022 was primarily due to Consumer Loan performance, as
the performance of Consumer Loans assigned during the first six months of 2022
has been significantly lower than our initial estimates, and a higher initial
spread on Consumer Loans assigned during the third quarter of 2022 due to the
advance rate decreasing by a greater margin than the initial forecast.
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The following table compares our forecast of Consumer Loan collection rates as ofSeptember 30, 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 September 30, Initial September 30, Initial Year 2022 Forecast Variance 2022 Forecast Variance 2013 73.4 % 72.1 % 1.3 % 74.3 % 71.6 % 2.7 % 2014 71.5 % 71.9 % -0.4 % 72.5 % 70.9 % 1.6 % 2015 64.5 % 67.5 % -3.0 % 68.9 % 68.5 % 0.4 % 2016 63.0 % 65.1 % -2.1 % 66.0 % 66.5 % -0.5 % 2017 64.0 % 63.8 % 0.2 % 66.3 % 64.6 % 1.7 % 2018 64.5 % 63.6 % 0.9 % 66.3 % 63.5 % 2.8 % 2019 66.2 % 63.9 % 2.3 % 67.1 % 64.2 % 2.9 % 2020 67.8 % 63.3 % 4.5 % 68.1 % 63.6 % 4.5 % 2021 66.6 % 66.3 % 0.3 % 67.3 % 66.3 % 1.0 % 2022 66.1 % 67.3 % -1.2 % 67.3 % 67.7 % -0.4 % (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 ofSeptember 30, 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 73.4 % 47.2 % 26.2 % 74.3 % 51.5 % 22.8 % 2014 71.5 % 47.2 % 24.3 % 72.5 % 51.8 % 20.7 % 2015 64.5 % 43.4 % 21.1 % 68.9 % 50.2 % 18.7 % 2016 63.0 % 42.1 % 20.9 % 66.0 % 48.6 % 17.4 % 2017 64.0 % 42.1 % 21.9 % 66.3 % 45.8 % 20.5 % 2018 64.5 % 42.7 % 21.8 % 66.3 % 45.2 % 21.1 % 2019 66.2 % 43.1 % 23.1 % 67.1 % 45.6 % 21.5 % 2020 67.8 % 43.0 % 24.8 % 68.1 % 45.5 % 22.6 % 2021 66.6 % 45.1 % 21.5 % 67.3 % 47.7 % 19.6 % 2022 66.1 % 46.5 % 19.6 % 67.3 % 50.1 % 17.2 % (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 21.5% in 2021 to 19.6% in 2022 primarily as a result of Consumer Loan performance, as the performance of 2021 Consumer Loans in our Dealer Loan portfolio has exceeded our initial estimates while the performance of 2022 Consumer Loans in our Dealer Loan portfolio has been significantly lower than 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 19.6% in 2021 to 17.2% in 2022 primarily as a result of Consumer Loan performance, as the performance of the 2021 Consumer Loans in our Purchased Loan portfolio has significantly exceeded our initial estimates while the performance of 2022 Consumer Loans in our Purchased Loan portfolio has been lower than 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 ofSeptember 30, 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 seven 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 %
June 30, 2022 5.1 % 22.0 %
September 30, 2022 29.3 % 32.1 %
(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 grew 29.3% and 32.1%, respectively, during the third quarter of 2022 as the number of active Dealers grew 12.6% and the average unit volume per active Dealer grew 15.1%. Unit volume forOctober 2022 grew 21.2% compared to unit volume forOctober 2021 . The comparable 2021 periods reflected significant declines in unit volume, which we believe were primarily due to low dealer inventories and elevated used vehicle prices, which we believe were primarily due to the downstream impact of supply chain disruptions in the automotive industry. 49
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The following table summarizes the changes in Consumer Loan unit volume and
active Dealers:
For the Three Months Ended September 30, For the Nine Months Ended September 30,
2022 2021 % Change 2022 2021 % Change
Consumer Loan unit volume 71,937 55,620 29.3 % 218,393 219,303 -0.4 %
Active Dealers (1) 8,547 7,588 12.6 % 10,880 10,815 0.6 %
Average volume per active
Dealer 8.4 7.3 15.1 % 20.1 20.3 -1.0 %
Consumer Loan unit volume from
Dealers active both periods 56,381 48,141 17.1 % 192,302 201,409 -4.5 %
Dealers active both periods 5,518 5,518 - 8,096 8,096 -
Average volume per Dealer
active both periods 10.2 8.7 17.1 % 23.8 24.9 -4.5 %
Consumer Loan unit volume from
Dealers not active both periods 15,556 7,479 108.0 % 26,091 17,894 45.8 %
Dealers not active both periods 3,029 2,070 46.3 % 2,784 2,719 2.4 %
Average volume per Dealer not
active both periods 5.1 3.6 41.7 % 9.4 6.6 42.4 %
(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 September 30, For the Nine Months Ended September 30,
2022 2021 % Change 2022 2021 % Change
Consumer Loan unit volume
from new active Dealers 2,522 1,476 70.9 % 17,653 12,361 42.8 %
New active Dealers (1) 674 460 46.5 % 2,044 1,615 26.6 %
Average volume per new
active Dealer 3.7 3.2 15.6 % 8.6 7.7 11.7 %
Attrition (2) -13.4 % -16.6 % -8.2 % -9.2 %
(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 seven 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 % June 30, 2022 74.0 % 26.0 % 70.4 % 29.6 % September 30, 2022 74.3 % 25.7 % 70.5 % 29.5 %
(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.
As ofSeptember 30, 2022 andDecember 31, 2021 , the net Dealer Loans receivable balance was 64.1% and 61.3%, respectively, of the total net Loans receivable balance. 50
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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)
2022 2021 $ Change % Change
Revenue:
Finance charges $ 420.6 $ 442.1 $ (21.5) -4.9 %
Premiums earned 16.4 15.4 1.0 6.5 %
Other income 23.3 12.6 10.7 84.9 %
Total revenue 460.3 470.1 (9.8) -2.1 %
Costs and expenses:
Salaries and wages (1) 66.9 63.2 3.7 5.9 %
General and administrative (1) 16.6 16.9 (0.3) -1.8 %
Sales and marketing (1) 19.7 16.3 3.4 20.9 %
Provision for credit losses 180.3 (8.3) 188.6 -2,272.3 %
Interest 41.8 39.8 2.0 5.0 %
Provision for claims 12.9 10.0 2.9 29.0 %
Total costs and expenses 338.2 137.9 200.3 145.3 %
Income before provision for income taxes 122.1 332.2 (210.1) -63.2 %
Provision for income taxes 35.3 82.2 (46.9) -57.1 %
Net income $ 86.8 $ 250.0 $ (163.2) -65.3 %
Net income per share:
Basic $ 6.53 $ 15.83 $ (9.30) -58.7 %
Diluted $ 6.49 $ 15.79 $ (9.30) -58.9 %
Weighted average shares outstanding:
Basic 13,293,224 15,795,963 (2,502,739) -15.8 %
Diluted 13,364,160 15,829,166 (2,465,006) -15.6 %
(1) Operating expenses$ 103.2 $ 96.4 $ 6.8 7.1 % 51
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Finance Charges. The decrease of$21.5 million , or 4.9%, was primarily the result of a decrease in the average net Loans receivable balance, as follows: (Dollars in millions) For the Three Months Ended September 30, 2022 2021 Change Average net Loans receivable balance$ 6,316.6 $ 6,676.8 $ (360.2) Average yield on our Loan portfolio 26.6 % 26.5 % 0.1 %
The following table summarizes the impact each component had on the overall
decrease in finance charges for the three months ended
(In millions) Year over Year Change
For the Three Months Ended
Impact on finance charges: September 30, 2022
Due to a decrease in the average net Loans receivable balance $ (23.9)
Due to an increase in the average yield 2.4
Total decrease in finance charges $ (21.5)
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.
Other Income. The increase of $10.7 million , or 84.9%, was primarily due to:
•A $5.2 million increase in remarketing fee income for fees related to the
repossession and remarketing of vehicles, which included $4.5 million of fees
charged to dealers for repossession activity that occurred from August 2020
through June 2022 .
•A $4.1 million increase in ancillary product profit sharing income primarily
due to a decrease in average claim rates on Guaranteed Asset Protection ("GAP")
contracts.
Operating Expenses. The increase of $6.8 million , or 7.1%, was primarily due to:
•An increase in salaries and wages expense of $3.7 million , or 5.9%, primarily
due to:
•An increase of $10.1 million , excluding stock-based compensation expense,
primarily related to an increase in the number of team members in our technology
department.
•A decrease of $6.4 million in stock-based compensation expense, primarily
related to stock options. From December 2020 through June 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 on July 21, 2021 . Accordingly, the first annual vesting installment was
recognized over the period from July 2021 through the first anniversary of the
date on which the options were granted, resulting in a higher expense during the
third quarter of 2021.
•An increase in sales and marketing expense of $3.4 million , or 20.9%, primarily
due to a change in the compensation plan for our sales force in September 2021 ,
an increase in the size of our sales force, and growth in Consumer Loan
assignment unit volume.
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Provision for Credit Losses. The increase of
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 EndedSeptember 30 ,
Provision for Credit Losses 2022 2021 Change
New Consumer Loan assignments $ 83.4$ 75.5 $ 7.9 Forecast changes 96.9 (83.8) 180.7 Total$ 180.3 $ (8.3) $ 188.6 The increase in provision for credit losses related to forecast changes was primarily due to a decline in Consumer Loan performance during the third quarter of 2022 compared to an improvement in Consumer Loan performance during the third quarter of 2021. During the third quarter of 2022, we reduced our estimate of future net cash flows by$85.4 million to reflect a decline in Consumer Loan performance during the period. During the third quarter of 2021, we increased our estimate of future net cash flows by$82.3 million to reflect an improvement in Consumer Loan performance during the period.
The increase in provision for credit losses related to new Consumer Loan assignments was primarily due to a 29.3% increase in Consumer Loan assignment unit volume, partially offset by a decrease in the average provision per Consumer Loan assignment.
Provision for Income Taxes. For the three months endedSeptember 30, 2022 , the effective income tax rate increased to 28.9% from 24.7% for the three months endedSeptember 30, 2021 . The increase was primarily due to changes in state and local tax laws that were enacted during the third quarter of 2022 and the impact of non-deductible expenses on our effective income tax rate, which increased in magnitude from 2021 to 2022 primarily due to a decrease in pre-tax income. 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. 53
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Nine 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 Nine Months Ended
data) September 30,
2022 2021 $ Change % Change
Revenue:
Finance charges $ 1,270.3 $ 1,312.4 $ (42.1) -3.2 %
Premiums earned 45.6 45.6 - - %
Other income 57.5 34.8 22.7 65.2 %
Total revenue 1,373.4 1,392.8 (19.4) -1.4 %
Costs and expenses:
Salaries and wages (1) 196.7 150.9 45.8 30.4 %
General and administrative (1) 67.8 79.9 (12.1) -15.1 %
Sales and marketing (1) 57.9 48.4 9.5 19.6 %
Provision for credit losses 351.1 (17.5) 368.6 -2,106.3 %
Interest 117.2 125.6 (8.4) -6.7 %
Provision for claims 34.0 29.3 4.7 16.0 %
Total costs and expenses 824.7 416.6 408.1 98.0 %
Income before provision for income taxes 548.7 976.2 (427.5) -43.8 %
Provision for income taxes 140.2 235.5 (95.3) -40.5 %
Net income $ 408.5 $ 740.7 $ (332.2) -44.8 %
Net income per share:
Basic $ 29.90 $ 44.77 $ (14.87) -33.2 %
Diluted $ 29.74 $ 44.73 $ (14.99) -33.5 %
Weighted average shares outstanding:
Basic 13,662,178 16,543,326 (2,881,148) -17.4 %
Diluted 13,737,871 16,559,639 (2,821,768) -17.0 %
(1) Operating expenses$ 322.4 $ 279.2 $ 43.2 15.5 %
Finance Charges. The decrease of
(Dollars in millions) For the Nine Months Ended September 30,
2022 2021 Change
Average net Loans receivable balance $ 6,316.9 $ 6,772.6 $ (455.7)
Average yield on our Loan portfolio 26.8 % 25.8 % 1.0 %
The following table summarizes the impact each component had on the overall
decrease in finance charges for the nine months ended
(In millions) Year over Year Change
For the Nine Months Ended
Impact on finance charges: September 30, 2022
Due to a decrease in the average net Loans receivable balance $ (88.3)
Due to an increase in the average yield 46.2
Total decrease in finance charges $ (42.1)
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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 nine months endedSeptember 30, 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$22.7 million , or 65.2%, was primarily due to: •A$16.3 million increase in ancillary product profit sharing income primarily due to a decrease in average claim rates on GAP contracts. •A$5.0 million increase in remarketing fee income for fees related to the repossession and remarketing of vehicles, which included$3.1 million of fees charged to dealers for repossession activity that occurred fromAugust 2020 throughDecember 2021 . Operating Expenses. The increase of$43.2 million , or 15.5%, was primarily due to: •An increase in salaries and wages expense of$45.8 million , or 30.4%, primarily due to: •An increase of$24.2 million , excluding stock-based compensation expense, primarily related to an increase in the number of team members in our technology department. •An increase of$21.6 million in stock-based compensation expense, primarily related to: •An$11.5 million reversal of expense during the second quarter of 2021 due to the forfeiture of unvested restricted stock and restricted stock units upon the retirement of our former Chief Executive Officer inMay 2021 . •An increase of$10.4 million 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 . •A decrease in general and administrative expense of$12.1 million , or 15.1%, primarily due to a decrease in legal expenses. Legal expenses for the nine months endedSeptember 30, 2021 included a$27.2 million settlement with theCommonwealth of Massachusetts to settle and fully resolve the claims asserted by theCommonwealth of Massachusetts against the Company, while legal expenses for the nine months endedSeptember 30, 2022 included the recognition of a$12.0 million contingent loss related to the Company reaching an agreement in principle to settle a previously-disclosed putative class action lawsuit.
Provision for Credit Losses. The increase of
We recognize provision for credit losses on new Consumer Loan assignments for contractual net cash flows that are not expected to be realized at the time of assignment. We also recognize provision for credit losses on forecast changes in the amount and timing of expected future net cash flows subsequent to assignment. The following table summarizes the provision for credit losses for each of these components: (In millions) For the Nine Months EndedSeptember 30 , Provision for Credit Losses 2022
2021 Change
New Consumer Loan assignments$ 283.5 $ 298.9 $ (15.4) Forecast changes 67.6 (316.4) 384.0 Total$ 351.1 $ (17.5) $ 368.6 The increase in provision for credit losses related to forecast changes was primarily due to a decline in Consumer Loan performance during the first nine months of 2022 compared to an improvement in Consumer Loan performance during the same period in 2021. During the first nine months of 2022, we reduced our estimate of future net cash flows by$18.6 million to reflect a decline in Consumer Loan performance during the period. During the first nine months of 2021, we increased our estimate of future net cash flows by$294.2 million to reflect an improvement in Consumer Loan performance during the period. The results for the first nine months of 2022 include the impact of forecasting methodology changes implemented during the first quarter, which upon implementation 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 55
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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 primarily due to a 0.4% decrease in Consumer Loan assignment unit volume and a decrease in the average provision per Consumer Loan assignment.
Provision for Income Taxes. For the nine months endedSeptember 30, 2022 , our effective income tax rate increased to 25.6% from 24.1% for the nine months endedSeptember 30, 2021 . The increase was primarily due to changes in state and local tax laws that were enacted during the third quarter of 2022 and an increase in non-deductible executive compensation expense. Additionally, the impact of non-deductible expenses on our effective income tax rate also increased in magnitude from 2021 to 2022 due to a decrease in pre-tax income. 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. Properties The COVID-19 pandemic had a significant impact on our work environment, as the vast majority of our team members began working remotely. Because our remote operations and processes proved successful early on, we now pursue a "remote first" strategy to take advantage of the national talent pool and an increased rate of team member satisfaction. While remote work has become the primary experience for most of our team members, we do have team members that, due to their personal preference or the nature of their responsibilities, have continued to work primarily in one of our office properties. Additionally, we have various on-site meetings, events and team building activities for which in-person attendance is encouraged. Therefore, we believe we will always have a need for some amount of office space. As a result of the "remote first" strategy, we have excess space in the two office buildings that we own inSouthfield, Michigan and the office space that we lease inHenderson, Nevada . OurHenderson lease, which we will not renew, expires inDecember 2022 . We are currently considering options to further reduce our office space, which could result in the sale of one or both of our buildings. As there is currently a significant amount of unoccupied office space inSouthfield , we believe the market value of our buildings and improvements, land and land improvements, and office furniture and equipment is significantly less than their combined carrying value of$39.2 million . If we were to reclassify one or both of these buildings as held for sale, we would be required to record an impairment charge to reduce the carrying value of the buildings held for sale to their estimated market value less costs to sell. 56
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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 ofSeptember 30, 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. OnJune 16, 2022 , we completed a$350.0 million Term ABS financing, which was used to repay outstanding indebtedness and for general corporate purposes. The financing has an expected annualized cost of approximately 5.4% (including the initial purchasers' fees and other costs), and it will revolve for 24 months, after which it will amortize based upon the cash flows on the contributed Loans.
On
OnJune 22, 2022 , we extended the maturity of our revolving secured line of credit facility fromJune 22, 2024 toJune 22, 2025 . Prior to this amendment, the amount of the facility was set to decrease by$35.0 million onJune 22, 2022 ; however, this amendment increased the amount of the facility by$10.0 million , resulting in a net decrease of$25.0 million , from$435.0 million to$410.0 million . As previously reported, the amount of the facility will further decrease by$25.0 million onJune 22, 2023 . Additionally, this amendment removed the covenant that required us to maintain consolidated net income of not less than$1 for the two most recently ended fiscal quarters. OnAugust 12, 2022 , we extended by three years the$500.0 million Term ABS financing that we entered into onAugust 28, 2019 and to which we refer as Term ABS 20192. Under the amendment effecting the extension, the date on which the financing will cease to revolve has been extended fromAugust 15, 2022 toAugust 15, 2025 . The amendment has also increased the interest rate under the financing from 3.13% to 5.15%. Cash and cash equivalents as ofSeptember 30, 2022 andDecember 31, 2021 was$10.7 million and$23.3 million , respectively. As ofSeptember 30, 2022 andDecember 31, 2021 , we had$1,171.1 million and$1,532.4 million , respectively, in unused and available lines of credit. Our total balance sheet indebtedness increased to$4,625.9 million as ofSeptember 30, 2022 from$4,616.3 million as ofDecember 31, 2021 , primarily due to stock repurchases. A summary of our scheduled principal debt maturities as ofSeptember 30, 2022 is as follows: (In millions) Year Scheduled Principal Debt Maturities (1) Remainder of 2022 $ 315.2 2023 1,608.8 2024 1,293.8 2025 1,026.4 2026 403.1 Over five years - Total $ 4,647.3
(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.
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Table of Contents 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.
The removal of the COVID forecast adjustment and the implementation of the enhanced forecasting methodology during the first quarter of 2022 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.
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•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 betweenRussia andUkraine 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. 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 theU.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. 59
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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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