Credit Acceptance Announces Third Quarter 2021 Results

Southfield, Michigan, Nov. 01, 2021 (GLOBE NEWSWIRE) -- Credit Acceptance Corporation (Nasdaq: CACC) (referred to as the “Company”, “Credit Acceptance”, “we”, “our”, or “us”) today announced consolidated net income of $250.0 million, or $15.79 per diluted share, for the three months ended September 30, 2021 compared to consolidated net income of $242.1 million, or $13.56 per diluted share, for the same period in 2020. For the nine months ended September 30, 2021, consolidated net income was $740.7 million, or $44.73 per diluted share, compared to consolidated net income of $254.7 million, or $14.17 per diluted share, for the same period in 2020.

Adjusted net income, a non-GAAP financial measure, for the three months ended September 30, 2021 was $219.1 million, or $13.84 per diluted share, compared to $167.0 million, or $9.36 per diluted share, for the same period in 2020. For the nine months ended September 30, 2021, adjusted net income was $614.2 million, or $37.09 per diluted share, compared to adjusted net income of $496.8 million, or $27.64 per diluted share, for the same period in 2020.

Our results for the third quarter of 2021 included:

• An increase in forecasted collection rates for Consumer Loans assigned in 2018 through 2021, which increased forecasted net cash flows from our loan portfolio by $82.3 million.

• Forecasted profitability per Consumer Loan assignment that is in excess of our initial estimate for Consumer Loans assigned in 2021 and significantly in excess of our initial estimates for Consumer Loans assigned in 2018 through 2020.

• A decline in Consumer Loan assignment volume, as unit and dollar volumes declined 29.4% and 17.9%, respectively, as compared to the third quarter of 2020.

• Stock repurchases of approximately 1.3 million shares, which represented 8.0% of the shares outstanding at the beginning of the quarter.

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, 2021 with the forecasts as of June 30, 2021, as of December 31, 2020 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 2021 Consumer Loans as of September 30, 2021 includes both Consumer Loans that were in our portfolio as of June 30, 2021 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 2012, 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 ended September 30, 2021, forecasted collection rates improved for Consumer Loans assigned in 2018 through 2021 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, 2021, forecasted collection rates improved for Consumer Loans assigned in 2017 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 and nine months ended September 30, 2021 and 2020 impacted forecasted net cash flows (forecasted collections less forecasted dealer holdback payments) as follows:

During the first quarter of 2020, we reduced our estimate of future net cash flows from our loan portfolio by $206.5 million, or 2.3% of the forecasted net cash flows at the start of the period, primarily due to the impact of the COVID-19 pandemic. The reduction was comprised of: (1) $44.3 million calculated by our forecasting model, which reflected lower realized collections during the first quarter of 2020 and (2) an additional $162.2 million, which represented our best estimate of the future impact of the COVID-19 pandemic on future net cash flows. Under the GAAP methodology that we employ (known as the current expected credit loss model or CECL), changes in the amount and timing of forecasted net cash flows are recorded as a provision for credit losses in the current period. We have continued to apply this adjustment to our forecast through the third quarter of 2021 as it continues to represent our best estimate of the impact of the COVID-19 pandemic on future net cash flows. The COVID-19 pandemic has created conditions that increase the level of uncertainty associated with our estimate of the amount and timing of future net cash flows from our loan portfolio.

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 2021 Consumer Loans include both Consumer Loans that were in our portfolio as of June 30, 2021 and Consumer Loans assigned during the most recent quarter. The following table provides averages for each of these segments:

The increase in the average Consumer Loan from the first six months of 2021 to the third quarter of 2021 was primarily the result of an increase in the average vehicle selling price.

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, 2021. 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 2021 Consumer Loans as of September 30, 2021 include both Consumer Loans that were in our portfolio as of June 30, 2021 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 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 19.8% to 27.5%, on an annual basis, over the last 10 years. The spread was at the high end of this range in 2012, when the competitive environment was unusually favorable, and much lower during other years (2015 through 2019 and 2021) when competition was more intense. Despite intense competition, the spread in 2020 was higher than other recent years due to Consumer Loan performance, which has exceeded our initial estimates by a significantly greater margin than the other years presented. The decrease in the spread from 2020 to 2021 was primarily the result of the performance of 2020 Consumer Loans, partially offset by a higher initial spread on 2021 Consumer Loans, primarily due to a higher initial forecast on 2021 Consumer Loans. The decrease in the spread from the first six months of 2021 to the third quarter of 2021 was primarily due to Consumer Loan performance.

The following table compares our forecast of Consumer Loan collection rates as of September 30, 2021 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, 2021 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 on dealer loans decreased from 24.4% in 2020 to 21.5% in 2021 primarily as a result of the performance of the 2020 Consumer Loans in our dealer loan portfolio, which has exceeded our initial estimates by a greater margin than those assigned to us in 2021, partially offset by a higher initial spread on 2021 Consumer Loans in our dealer loan portfolio, primarily due to a higher initial forecast on 2021 Consumer Loans in our dealer loan portfolio. The spread on purchased loans decreased from 22.7% in 2020 to 19.6% in 2021 primarily as a result of the performance of the 2020 Consumer Loans in our purchased loan portfolio, which has exceeded our initial estimates by a greater margin than those assigned to us in 2021, partially offset by a higher initial spread on 2021 Consumer Loans in our purchased loan portfolio, primarily due to a higher initial forecast on 2021 Consumer Loans in our purchased loan portfolio.

Consumer Loan Volume

The following table summarizes changes in Consumer Loan assignment volume in each of the last eleven 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 declined 29.4% and 17.9%, respectively, during the third quarter of 2021 as the number of active dealers declined 15.0% and the average unit volume per active dealer declined 17.0%. Dollar volume declined less than unit volume during the third quarter of 2021 due to an increase in the average advance paid per unit. This increase was the result of an increase in the average size of the Consumer Loans assigned, primarily due to an increase in the average vehicle selling price.

The following table summarizes changes in Consumer Loan assignment unit volume in each of the last three quarters as compared to the same periods in 2019:

Starting in mid-March 2020, we experienced a significant decline in unit volume that we believe was primarily due to the impact of COVID-19, which resulted in many dealers temporarily closing or restricting their operations and a deterioration in consumer demand for dealers that remained open. During the latter part of April 2020 and continuing into July 2020, unit volumes improved. We believe the improvement resulted from a combination of dealers gradually reopening their operations and the distribution of federal stimulus and enhanced unemployment benefit payments. Starting in late July 2020 and continuing through February 2021, we experienced another significant decline in unit volume as federal stimulus and enhanced unemployment benefit payments lapsed, dealer inventories declined and used vehicle prices increased. Unit volumes improved again in March and April 2021 as additional federal stimulus payments were distributed. Starting in May 2021 and continuing through October 2021, we experienced another significant decline in unit volume. We believe that this decline is 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. Unit volume for October 2021 declined 25.6% and 38.9% compared to unit volume for October 2020 and October 2019, respectively.

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, 2021 and December 31, 2020, the net dealer loans receivable balance was 61.2% and 61.4%, respectively, of the total net loans receivable balance.

Financial Results

The increase in GAAP net income for the three months ended September 30, 2021, as compared to the same period in 2020, was primarily the result of the following:

• An increase in finance charges of 9.3% ($37.7 million), primarily due to an increase in the average yield on our loan portfolio, primarily due to the adoption of CECL on January 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.

• A decrease in interest expense of 15.0% ($7.0 million), primarily due to a decrease in our average cost of debt. The decrease in our average cost of debt was primarily the result of lower interest rates on recently-completed secured financings.

• An increase in other income of 80.0% ($5.6 million), primarily due to an increase in ancillary product profit sharing income due to a decrease in average vehicle service contract claim rates.

• An increase in provision for income taxes of 7.7% ($5.9 million), due to an increase in our taxable income and an increase in our effective tax rate.

• An increase in operating expenses of 19.9% ($16.0 million), due to an increase in salaries and wages expense of 35.6% ($16.6 million), primarily due to a $14.7 million increase in stock-based compensation expense 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, that vest and become exercisable in four equal annual installments beginning on the first anniversary of the date on which the options were granted. Stock compensation expense is normally recognized over the vesting period starting from the grant date. However, since our grants were dependent upon shareholder approval, no stock compensation expense could be recognized until we received shareholder approval at the annual meeting in July 2021. At that time, we began recognizing the fair value of the stock options as stock-based compensation expense over the remaining vesting period. This resulted in the expense for the first annual vesting installment being recognized over a shorter time period as it is being recognized over the period from July 2021 through the first anniversary of the date on which the options were granted. The expense for subsequent annual vesting installments will be recognized over their respective annual vesting periods.

• A decrease in the reversal of provision for credit losses of 72.1% ($21.5 million), due to:

  • A decrease in the reversal of provision for credit losses on forecast changes of $60.1 million, primarily due to a smaller improvement in Consumer Loan performance.

  • A decrease in provision for credit losses on new Consumer Loan assignments of $38.6 million, due to a 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 2021 Consumer Loan assignments.

The increase in GAAP net income for the nine months ended September 30, 2021, as compared to the same period in 2020, was primarily the result of the following:

• A decrease in provision for credit losses of 103.8% ($481.8 million), due to:

  • A decrease in provision for credit losses on forecast changes of $354.5 million, primarily due to an improvement in Consumer Loan performance.

  • A decrease in provision for credit losses on new Consumer Loan assignments of $127.3 million, due to a 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 2021 Consumer Loan assignments.

• An increase in finance charges of 14.7% ($167.9 million), primarily the result of an increase in the average yield on our loan portfolio, primarily due to the adoption of CECL on January 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.

• A decrease in interest expense of 14.5% ($21.3 million), primarily due to a decrease in our average cost of debt. The decrease in our average cost of debt was primarily the result of lower interest rates on recently-completed secured financings.

• An increase in operating expenses of 15.8% ($38.1 million), primarily due to:

  • An increase in general and administrative expense of 70.7% ($33.1 million), primarily due to an increase in legal expenses, which included a $27.2 million settlement with the Commonwealth of Massachusetts to settle and fully resolve the claims asserted against the Company.

  • An increase in salaries and wages expense of 7.5% ($10.5 million), primarily due to:

    • An increase of $13.8 million, excluding fringe benefits and cash-based incentive compensation expense, related to increases of $7.7 million for our support function, $4.4 million for our servicing function and $1.7 million for our originations function. The increase in our support function was primarily related to a $7.0 million increase related to our information technology department.

    • An increase of $4.0 million in fringe benefits primarily due to higher medical claims.

    • A decrease of $7.3 million in cash-based incentive compensation expense, primarily due to a change in the incentive compensation program for senior management, which eliminated annual cash awards in favor of longer-term equity awards, partially offset by an increase in profit sharing primarily due to an improvement in Company performance measures.

• An increase in provision for income taxes of 199.2% ($156.8 million), primarily due to an increase in our taxable income.

Adjusted financial results are provided to help shareholders understand our financial performance. The financial data below is non-GAAP, unless labeled otherwise. We use adjusted financial information internally to measure financial performance and to determine incentive compensation. In addition, effective January 1, 2020, certain debt facilities utilize adjusted financial information for the determination of loan collateral values. The table below shows our results following adjustments to reflect non-GAAP accounting methods. Material adjustments are explained in the table footnotes and the subsequent “Floating Yield Adjustment” and “Senior Notes Adjustment” sections. Measures such as adjusted average capital, adjusted net income, adjusted net income per diluted share, adjusted interest expense (after-tax), adjusted net income plus interest expense (after-tax), adjusted return on capital, adjusted revenue, operating expenses, adjusted loans receivable and economic profit are all non-GAAP financial measures. These non-GAAP financial measures should be viewed in addition to, and not as an alternative for, our reported results prepared in accordance with GAAP.

Adjusted financial results for the three and nine months ended September 30, 2021, compared to the same periods in 2020, include the following:

Economic profit increased 38.7% and 22.5%, respectively, for the three and nine months ended September 30, 2021, as compared to the same periods in 2020. Economic profit is a function of the return on capital in excess of the cost of capital and the amount of capital invested in the business. The following table summarizes the impact each of these components had on the changes in economic profit for the three and nine months ended September 30, 2021, as compared to the same periods in 2020:

The increase in economic profit for the three months ended September 30, 2021, as compared to the same period in 2020, was primarily the result of the following:

• An increase in our adjusted return on capital of 290 basis points, primarily due to:

  • An increase in the yield used to recognize adjusted finance charges on our loan portfolio increased our adjusted return on capital by 340 basis points, primarily due to an improvement in Consumer Loan performance.

  • Growth in operating expenses decreased our adjusted return on capital by 80 basis points as operating expenses grew by 19.9% while adjusted average capital decreased by 2.2%.

• An increase in our cost of capital of 30 basis points, primarily due to an increase in the 30-year Treasury rate, which is used in the average cost of equity calculation, partially offset by a decline in the average cost of debt.

The increase in economic profit for the nine months ended September 30, 2021, as compared to the same period in 2020, was primarily the result of the following:

• An increase in our adjusted return on capital of 160 basis points, primarily due to:

  • An increase in the yield used to recognize adjusted finance charges on our loan portfolio increased our adjusted return on capital by 200 basis points, primarily due to an improvement in Consumer Loan performance.

  • Faster growth in operating expenses decreased our adjusted return on capital by 50 basis points as operating expenses grew by 15.8% while adjusted average capital grew by 2.5%.

• An increase in our cost of capital of 40 basis points, primarily due to an increase in the 30-year Treasury rate, which is used in the average cost of equity calculation, partially offset by a decline in the average cost of debt.

The following table shows adjusted revenue and operating expenses as a percentage of adjusted average capital, the adjusted return on capital, and the percentage change in adjusted average capital for each of the last eight quarters, compared to the same period in the prior year:

(1) Annualized.

The increase in adjusted revenue as a percentage of adjusted average capital for the three months ended September 30, 2021, as compared to the three months ended June 30, 2021, was primarily due to an increase in the yield used to recognize adjusted finance charges on our loan portfolio, primarily due to an improvement in Consumer Loan performance. The increase in adjusted revenue increased our adjusted return on capital by 120 basis points.

The increase in operating expenses as a percentage of adjusted average capital for the three months ended September 30, 2021, as compared to the three months ended June 30, 2021, was due to an increase in operating expenses of 37.3% ($26.2 million) and a decrease in adjusted average capital of 4.6%. The increase in operating expenses was primarily due to an increase in salaries and wages expense of 64.6% ($24.8 million), primarily due to an increase in stock-based compensation expense as a result of:

• $14.7 million of expense 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, that vest and become exercisable in four equal annual installments beginning on the first anniversary of the date on which the options were granted. Stock compensation expense is normally recognized over the vesting period starting from the grant date. However, since our grants were dependent upon shareholder approval, no stock compensation expense could be recognized until we received shareholder approval at the annual meeting in July 2021. At that time, we began recognizing the fair value of the stock options as stock-based compensation expense over the remaining vesting period. This resulted in the expense for the first annual vesting installment being recognized over a shorter time period as it is being recognized over the period from July 2021 through the first anniversary of the date on which the options were granted. The expense for subsequent annual vesting installments will be recognized over their respective annual vesting periods.

• $11.5 million reversal of expense during the second quarter of 2021 related to the forfeiture of unvested restricted stock and restricted stock units upon the retirement of our former Chief Executive Officer.

The increase in operating expenses decreased our adjusted return on capital by 130 basis points.

The following tables provide a reconciliation of non-GAAP measures to GAAP measures. Certain amounts do not recalculate due to rounding.