CACC - Credit Acceptance Announces Third Quarter 2023 Results | Benzinga

Southfield, Michigan, Oct. 30, 2023 (GLOBE NEWSWIRE) -- Credit Acceptance Corporation (NASDAQ:CACC) (referred to as the "Company", "Credit Acceptance", "we", "our", or "us") today announced consolidated net income of $70.8 million, or $5.43 per diluted share, for the three months ended September 30, 2023 compared to consolidated net income of $86.8 million, or $6.49 per diluted share, for the same period in 2022. Adjusted net income, a non-GAAP financial measure, for the three months ended September 30, 2023 was $139.5 million, or $10.70 per diluted share, compared to $178.5 million, or $13.36 per diluted share, for the same period in 2022. The following table summarizes our financial results:

^{(1)   Represents a non-GAAP financial measure.}

Our results for the third quarter of 2023 in comparison to the third quarter of 2022 included:

• A decrease in forecasted collection rates during the third quarter of 2023 that decreased forecasted net cash flows from our loan portfolio by $69.4 million, or 0.7%, compared to a decrease in forecasted collection rates during the third quarter of 2022 that decreased forecasted net cash flows from our loan portfolio by $85.4 million, or 0.9%.
• Forecasted profitability for Consumer Loans assigned in 2020 through 2022 that was lower than our estimates at September 30, 2022, due to a decline in forecasted collection rates since the third quarter of 2022 and slower forecasted net cash flow timing during 2023, primarily as a result of a decrease in Consumer Loan prepayments to below-average levels.
• Growth in Consumer Loan assignment volume, as unit and dollar volumes grew 13.0% and 10.5%, respectively, as compared to the third quarter of 2022. The average balance of our loan portfolio on a GAAP and adjusted basis for the third quarter of 2023 increased 5.9% and 10.6%, respectively, as compared to the third quarter of 2022.
• An increase in the initial spread on Consumer Loan assignments to 21.4% on Consumer Loans assigned in the third quarter of 2023 compared to 20.2% on Consumer Loans assigned in the third quarter of 2022.
• An increase in our average cost of debt, which was primarily a result of higher interest rates on recently-completed or extended secured financings and the repayment of older secured financings with lower interest rates.
  
  

Our results for the third quarter of 2023 in comparison to the second quarter of 2023 included:

• A decrease in forecasted collection rates during the third quarter of 2023 that decreased forecasted net cash flows from our loan portfolio by $69.4 million, or 0.7%, compared to a decrease in forecasted collection rates during the second quarter of 2023 that decreased forecasted net cash flows from our loan portfolio by $89.3 million, or 0.9%.
• Forecasted profitability for Consumer Loans assigned in 2020 through 2022 that was lower than our estimates at June 30, 2023, due to the decline in forecasted collection rates during the third quarter of 2023 and the slower forecasted net cash flow timing discussed above.
• The average balance of our loan portfolio on a GAAP and adjusted basis for the third quarter of 2023 increased 1.4% and 3.4%, respectively, as compared to the second quarter of 2023.
• An increase in the initial spread on Consumer Loan assignments to 21.4% on Consumer Loans assigned in the third quarter of 2023 compared to 21.2% on Consumer Loans assigned in the second quarter of 2023.
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Consumer Loan Metrics

Dealers assign retail installment contracts (referred to as "Consumer Loans") to Credit Acceptance. 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, a non-GAAP financial measure that considers our return on capital, our cost of capital, and the amount of capital invested. 

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 of September 30, 2023, with the forecasts as of June 30, 2023, as of December 31, 2022, and at the time of assignment, segmented by year of assignment:

^{(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 2023 Consumer Loans as of September 30, 2023 includes both Consumer Loans that were in our portfolio as of June 30, 2023 and Consumer Loans assigned during the most recent quarter. The following table provides forecasted collection rates for each of these segments.}

Consumer Loans assigned in 2018 through 2020 have yielded forecasted collection results significantly better than our initial estimates, while Consumer Loans assigned in 2015, 2016, 2021, and 2022 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 September 30, 2023, forecasted collection rates declined for Consumer Loans assigned in 2020 through 2022 and were generally consistent with expectations at the start of the period for all other assignment years presented. For the nine months ended September 30, 2023, forecasted collection rates improved for Consumer Loans assigned in 2018 and 2019, declined for Consumer Loans assigned in 2020 through 2022, 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 and nine months ended September 30, 2023 and 2022 impacted forecasted net cash flows (forecasted collections less forecasted dealer holdback payments) as follows:

During the second quarter of 2023, we adjusted our methodology for forecasting the amount and timing of future net cash flows from our loan portfolio through the utilization of more recent Consumer Loan performance and Consumer Loan prepayment data. During the first half of 2023, we experienced a decrease in Consumer Loan prepayments to below-average levels and, as a result, slowed our forecasted net cash flow timing. The below-average levels of Consumer Loan prepayments continued through the third quarter of 2023. Historically, Consumer Loan prepayments have been lower in periods with less availability of consumer credit. Changes in the amount and timing of forecasted net cash flows are recognized in our GAAP results in the period of change through provision for credit losses and in our adjusted results prospectively over the remaining forecast period of the loans through finance charges. The implementation of the adjustment to our forecasting methodology during the second quarter of 2023 reduced forecasted net cash flows by $44.5 million, or 0.5%, and increased provision for credit losses by $71.3 million.

We have experienced increased levels of uncertainty associated with our estimate of the amount and timing of future net cash flows from our loan portfolio since the beginning of 2020, with realized collections underperforming our expectations during the early stages of the COVID-19 pandemic, outperforming our expectations following the distribution of federal stimulus payments and enhanced unemployment benefits, and underperforming our expectations during the current economic environment. For the period from January 1, 2020 through September 30, 2023, the cumulative change to our forecast of future net cash flows from our loan portfolio has been an increase of $70.8 million, or 0.8%. Forecasting collection rates accurately is challenging, so we have designed our business model to produce acceptable levels of profitability, even if loan performance is less than forecasted.

The following table presents information on the average Consumer Loan assignment for each of the last 10 years:

^{(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 2023 Consumer Loans include both Consumer Loans that were in our portfolio as of June 30, 2023 and Consumer Loans assigned during the most recent quarter. The following table provides averages for each of these segments:}

The profitability of our loans is primarily driven by the amount and timing of the net cash flows we receive from the spread between the forecasted collection rate and the advance rate, less operating expenses and the cost of capital. 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 of September 30, 2023, as well as the forecasted collection rates and spread at the time of assignment. 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.

^{(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 2023 Consumer Loans as of September 30, 2023 include both Consumer Loans that were in our portfolio as of June 30, 2023 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:}

The risk of a material change in our forecasted collection rate declines as the Consumer Loans age. For 2019 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 as of September 30, 2023 and the advance rate ranges from 16.1% to 24.0%, on an annual basis, for Consumer Loans assigned over the last 10 years. The spreads with respect to 2019 and 2020 Consumer Loans have been positively impacted by Consumer Loan performance, which has exceeded our initial estimates by a greater margin than the other years presented. The spread with respect to 2022 Consumer Loans has been negatively impacted by Consumer Loan performance, which has been lower than our initial estimates by a greater margin than the other years presented. The higher spread for 2023 Consumer Loans relative to 2022 Consumer Loans as of September 30, 2023 is primarily due to the performance of the 2022 Consumer Loans. Additionally, 2023 Consumer Loans had a higher initial spread primarily due to a decrease in the advance rate.

The following table compares our forecast of Consumer Loan collection rates as of September 30, 2023 with the forecasts at the time of assignment, for dealer loans and purchased loans separately:

^{(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 of September 30, 2023 for dealer loans and purchased loans separately.  All amounts are presented as a percentage of the initial balance of the Consumer Loan (principal + interest).

^{(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.

The spread as of September 30, 2023 on 2023 dealer loans was 21.7%, as compared to a spread of 16.5% on 2022 dealer loans. The increase was primarily as a result of Consumer Loan performance, as the performance of 2022 dealer loans has been significantly lower than our initial estimates. Additionally, 2023 dealer loans had a higher initial spread, due to the advance rate decreasing by a greater margin than the initial forecast.

The spread as of September 30, 2023 on 2023 purchased loans was 20.1%, as compared to a spread of 14.9% on 2022 purchased loans. The increase was primarily as a result of Consumer Loan performance, as the performance of 2022 purchased loans has been significantly lower than our initial estimates while the performance of 2023 purchased loans has exceeded our initial estimates. Additionally, 2023 purchased loans had a higher initial spread, due to a higher initial forecast and a lower advance rate.

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:

^{(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 13.0% and 10.5%, respectively, during the third quarter of 2023 as the number of active dealers grew 14.9% and the average unit volume per active dealer decreased 1.2%. Dollar volume increased less than unit volume during the third quarter of 2023 due to a decrease in the average advance paid, due to decreases in the average advance rate and the average size of Consumer Loans assigned. Unit volume for the third quarter of 2023 was 5.8% less than unit volume for the third quarter of 2019, which was the highest third quarter unit volume in our history. Unit volume for the 28-day period ended October 28, 2023 grew 27.5% and declined 0.9% compared to the same periods in 2022 and 2019, respectively. We believe the improvement in unit volume growth rates from the third quarter of 2023 to October 2023 was likely due to an improvement in the competitive environment.

The following table summarizes the changes in Consumer Loan unit volume and active dealers:

^{(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: 

^{(1)   New active dealers are dealers who enrolled in our program and have received funding for their first dealer loan or purchased 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 dealer loan or purchased loan during the comparable period of the prior year but did not receive funding for any dealer loans or purchased 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:

^{(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 September 30, 2023 and December 31, 2022, the net dealer loans receivable balance was 66.6% and 64.7%, respectively, of the total net loans receivable balance.

Financial Results

The decrease in GAAP net income for the three months ended September 30, 2023, as compared to the same period in 2022, was primarily a result of the following:

• An increase in interest expense of 68.7% ($28.7 million), primarily due to an increase in our average cost of debt, which was primarily a result of higher interest rates on recently-completed or extended secured financings and the repayment of older secured financings with lower interest rates.
• An increase in operating expenses of 7.1% ($7.3 million), primarily due to:
  
  • An increase in general and administrative expense of 28.3% ($4.7 million), primarily due to an increase in technology systems expenses.
  • An increase in sales and marketing expense of 14.2% ($2.8 million), primarily due to investments in our business to enhance our sales and marketing strategy and an increase in the size of our sales force.
• A decrease in other income of 30.9% ($7.2 million) primarily due to:
  
  • A $5.9 million decrease in ancillary product profit sharing income primarily due to increases in average claim rates and volume of claims on Guaranteed Asset Protection ("GAP") contracts.
  • A $4.6 million decrease in remarketing fee income for fees charged to dealers related to the repossession and remarketing of vehicles. Remarketing fee income for the three months ended September 30, 2022 included $4.5 million of fees charged to dealers for repossession activity that occurred in August 2020 through June 2022.
  • A $3.4 million increase in interest income due to increases in benchmark interest rates and the average restricted cash and cash equivalents balance.
• A decrease in provision for income taxes of 27.2% ($9.6 million), primarily due to a decrease in taxable income.
• An increase in finance charges of 5.0% ($21.1 million), primarily due to an increase in the average balance of our loan portfolio.

The decrease in GAAP net income for the nine months ended September 30, 2023, as compared to the same period in 2022, was primarily a result of the following:

• An increase in provision for credit losses of 63.1% ($221.4 million), primarily due to an increase in provision for credit losses on forecast changes of $251.8 million, primarily due to a greater decline in Consumer Loan performance during the first nine months of 2023 compared to the first nine months of 2022. During the first nine months of 2023, we decreased our estimate of future net cash flows by $149.3 million, or 1.7%, to reflect a decline in forecasted collection rates during the period and slowed our forecasted net cash flow timing to reflect a decrease in Consumer Loan prepayments to below-average levels. Historically, Consumer Loan prepayments have been lower in periods with less availability of consumer credit. The $149.3 million decrease in forecasted net cash flows for the first nine months of 2023 included the impact of an adjustment to our forecasting methodology during the second quarter of 2023, which, upon implementation, decreased our estimate of future net cash flows by $44.5 million, or 0.5%, and increased our provision for credit losses by $71.3 million. We adjusted our methodology for forecasting the amount and timing of future net cash flows from our loan portfolio through the utilization of more recent Consumer Loan performance and Consumer Loan prepayment data. During the first nine months of 2022, we decreased our estimate of future net cash flows by $18.6 million, or 0.2%, to reflect a decline in Consumer Loan performance during the period. The $18.6 million decrease in forecasted net cash flows for the first nine months of 2022 included the impact of forecasting methodology changes during the first quarter of 2022, 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 following table summarizes each component of provision for credit losses:
  
  

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