CREDIT ACCEPTANCE CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) | --- | --- | --- | --- | --- | --- | --- | --- | --- | |----------------------------------------------------------------|-------|------------------------------------------|--------------------|------------------------|-------|-----------------------------------------|--------------------|----------------------| | (In millions) \nNet income | $ | For the Three June \n2023 \n22.2 | Months 30, \n$ | Ended \n2022 \n107.4 ...

Financial Data and Key Metrics Changes - Adjusted net income decreased by 35.6% to $127 million for Q1 2023 compared to Q1 2022 [13] - Adjusted earnings per share decreased by 29.4% to $9.71 from Q1 2022 [13] - The average balance of the loan portfolio increased by 0.8% on a GAAP basis and 5.1% on an adjusted basis compared to Q1 2022 [12] - Forecasted net cash flows from the loan portfolio increased by $9.4 million or 0.1% in Q1 2023 [4] Business Line Data and Key Metrics Changes - Growth in consumer loan assignment volume increased by 22.8% in units and 18.6% in dollar volumes compared to Q1 2022 [18] - The initial spread on consumer loans assigned in Q1 2023 was 21%, up from 19.4% in Q1 2022 [5] Market Data and Key Metrics Changes - The company noted stable forecasted collection rates during Q1 2023, contrasting with the elevated consumer loan performance seen in Q1 2022 due to federal stimulus payments [4] Company Strategy and Development Direction - The company is investing in its engineering department to enhance products and transform technology systems to be more dealer and customer-focused, leading to a 14.4% increase in operating expenses compared to Q1 2022 [19] - The company aims to maintain capital to fund anticipated levels of loan originations while considering market conditions and regulatory matters [49] Management's Comments on Operating Environment and Future Outlook - Management indicated that the debt markets have reacted to concerns around credit quality, with tighter and more expensive credit markets compared to 18 months ago [45] - The company expects to continue growing its portfolio based on April numbers, although this could change in the coming months [24] Other Important Information - The company reported a provision for forecast changes of $44 million, primarily due to the slowdown in cash flow timing [60] - Management emphasized the importance of building a significant margin of safety into loans to mitigate uncertainties in the underwriting process [41] Q&A Session Summary Question: How do you program the unique environment with rising rates and inflation? - Management stated they have a good track record in predicting collection rates over a large number of loans but cannot predict individual outcomes [23] Question: How does the funding environment change with recent bank failures? - Management noted that while the funding environment remains stable for them, credit markets are tighter and more expensive than before [45] Question: What is the appetite for share repurchases given slower growth? - Management indicated that share repurchases are considered when they can buy stock for less than its worth, depending on capital availability [54] Question: What were the growth rates for unit originations in Q1? - Management reported growth rates of 39% in January, 27% in February, and 12% in March, attributing variability to prior year comparisons [68] Question: Any updates on the CFPB and New York AG issue? - Management stated that the latest updates are included in the 10-Q filed on the same day [52]

The following table compares our forecast of Consumer Loan collection rates as of March 31, 2023 with the forecasts at the time of assignment, for Dealer Loans and Purchased Loans separately: | --- | --- | --- | --- | --- | --- | --- | |-------------------------------------|-------------------------------------------------------|---------------------------------------------------------|----------|--------------------------------------------------|------------------------------------------------------------- ...

PART I [Business](index=3&type=section&id=Item%201.%20Business) The company provides indirect auto financing to consumers with limited credit history through a nationwide dealer network [Principal Business and Programs](index=4&type=section&id=Principal%20Business%20and%20Programs) The company operates two main financing programs for dealers, with the Portfolio Program representing the majority of volume - The company offers two financing programs for auto dealers: the Portfolio Program (advances to dealers) and the Purchase Program (outright purchase of consumer loans)[277](index=277&type=chunk) Consumer Loan Assignment Volume by FICO Score | Year | % of total unit volume with FICO scores below 650 or no FICO scores | | :--- | :--- | | 2022 | 84.8% | | 2021 | 91.0% | | 2020 | 94.9% | Financing Program Mix by Volume (2020-2022) | Year | Program | Unit Volume % | Dollar Volume % | | :--- | :--- | :--- | :--- | | 2022 | Portfolio Program | 73.5% | 69.8% | | | Purchase Program | 26.5% | 30.2% | | 2021 | Portfolio Program | 67.9% | 65.0% | | | Purchase Program | 32.1% | 35.0% | | 2020 | Portfolio Program | 64.1% | 60.6% | | | Purchase Program | 35.9% | 39.4% | [Operations and Revenue](index=6&type=section&id=Operations%20and%20Revenue) Revenue is primarily driven by finance charges, and operations rely on a proprietary system to manage loan processing and risk Revenue Sources as a Percentage of Total Revenue | Source | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Finance charges | 92.0% | 93.9% | 93.6% | | Premiums earned | 3.4% | 3.2% | 3.4% | | Other income | 4.6% | 2.9% | 3.0% | Dealer Network Statistics (2020-2022) | Year | Dealer Enrollments | Active Dealers | | :--- | :--- | :--- | | 2022 | 3,627 | 11,901 | | 2021 | 2,804 | 11,410 | | 2020 | 3,413 | 12,690 | - All consumer loans are processed through the company's internet-based Credit Approval Processing System (CAPS), which utilizes a proprietary credit scoring system to determine funding amounts based on expected collection rates[310](index=310&type=chunk) [Geographic Concentration and Competition](index=10&type=section&id=Geographic%20Concentration%20and%20Competition) The company operates in a highly competitive market with a notable concentration of loan volume in five key states - The company competes in a large and highly competitive market against banks, captive finance companies, credit unions, and independent finance companies[320](index=320&type=chunk)[348](index=348&type=chunk) Top 5 States by Consumer Loan Dollar Volume (2022) | State | Dollar Volume ($M) | % of Total | | :--- | :--- | :--- | | Michigan | $353.0 | 9.7% | | New York | $229.8 | 6.3% | | Ohio | $205.7 | 5.7% | | Texas | $205.5 | 5.7% | | New Jersey | $204.0 | 5.6% | | **Total Top 5** | **$1,198.0** | **33.0%** | [Regulation and Legal Matters](index=12&type=section&id=Regulation%20and%20Legal%20Matters) The company is subject to extensive regulation and is currently involved in several significant regulatory investigations - The business is subject to numerous laws and regulations, including the Truth in Lending Act, Equal Credit Opportunity Act, and prohibitions against unfair, deceptive, and abusive acts and practices (UDAAP)[323](index=323&type=chunk) - On January 4, 2023, the Office of the New York State Attorney General and the CFPB jointly filed a complaint against the company alleging **deceptive and abusive practices**[4](index=4&type=chunk)[386](index=386&type=chunk) - The company is also involved in ongoing regulatory inquiries from the U.S. Department of Justice (since 2014), the California Attorney General (regarding GAP products), and a multi-state investigation led by the Maryland Attorney General[5](index=5&type=chunk)[353](index=353&type=chunk)[354](index=354&type=chunk) [Human Capital](index=15&type=section&id=Human%20Capital) The company employs over 2,200 team members and has adopted a "remote first" work strategy - The company employed **2,246 team members** as of year-end 2022, an increase from 2,073 in 2021[8](index=8&type=chunk)[357](index=357&type=chunk) - The company has adopted a **"remote first" strategy**, with the vast majority of its team members working remotely from locations across the United States[33](index=33&type=chunk)[329](index=329&type=chunk) [Risk Factors](index=15&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks from its subprime lending model, competition, debt covenants, and regulatory scrutiny [Industry, Operational and Macroeconomic Risks](index=16&type=section&id=Industry%2C%20Operational%20and%20Macroeconomic%20Risks) Key risks include inaccurate loan collection forecasting, intense competition, and sensitivity to economic downturns - The inability to accurately forecast the amount and timing of future collections on subprime auto loans is a **critical risk** that could materially affect results of operations[359](index=359&type=chunk)[392](index=392&type=chunk) - The company faces **intense competition** from traditional and non-traditional lenders, which may impact its ability to acquire consumer loans at desired volumes and terms[10](index=10&type=chunk)[393](index=393&type=chunk) - **Adverse economic conditions**, such as a recession, inflation, or high unemployment, could increase loan defaults and losses, particularly given the focus on the non-prime consumer market[17](index=17&type=chunk)[400](index=400&type=chunk) [Capital and Liquidity Risks](index=20&type=section&id=Capital%20and%20Liquidity%20Risks) Substantial debt exposes the company to financing, interest rate, and restrictive covenant risks - The company's **substantial debt** could negatively impact the business, with a significant portion of cash flow dedicated to debt service[24](index=24&type=chunk)[407](index=407&type=chunk) - Debt agreements contain **restrictive covenants** that limit the company's ability to incur more debt, pay dividends, make acquisitions, and sell assets[22](index=22&type=chunk)[172](index=172&type=chunk)[405](index=405&type=chunk) - Fluctuations in interest rates may adversely affect borrowing costs, as some debt facilities have variable rates[140](index=140&type=chunk)[408](index=408&type=chunk)[439](index=439&type=chunk) [Technology and Cybersecurity Risks](index=23&type=section&id=Technology%20and%20Cybersecurity%20Risks) The business is highly dependent on its technology platforms and faces significant risks from system interruptions and cyber attacks - The business relies heavily on its internet-based CAPS application for loan origination and a technology-based platform for servicing, making it **vulnerable to system interruptions**[28](index=28&type=chunk) - The company collects and stores sensitive consumer and employee data, making it a target for cyber attacks[30](index=30&type=chunk)[60](index=60&type=chunk)[141](index=141&type=chunk) - The use of electronic contracts for loan assignments introduces a risk that the company's ownership or security interest may not be legally perfected[29](index=29&type=chunk)[411](index=411&type=chunk) [Legal and Regulatory Risks](index=24&type=section&id=Legal%20and%20Regulatory%20Risks) The company faces risks from ongoing litigation, regulatory investigations, and potential changes in tax laws - The company is subject to various consumer claims, litigation, and regulatory investigations that could result in **substantial damages, fines, and penalties**[380](index=380&type=chunk)[412](index=412&type=chunk) - Changes in statutory income tax rates or adverse outcomes related to uncertain tax positions could have a **material adverse effect** on results of operations and cash flows[62](index=62&type=chunk)[413](index=413&type=chunk) [Properties](index=24&type=section&id=Item%202.%20Properties) The company owns two office buildings but has significant excess space, creating a risk of a material impairment charge - The company owns two office buildings in Southfield, Michigan, with a combined carrying value of **$38.2 million** for buildings, land, and equipment[174](index=174&type=chunk)[444](index=444&type=chunk) - A "remote first" strategy has resulted in significant excess office space, and the company is considering selling or leasing one or both buildings[33](index=33&type=chunk)[174](index=174&type=chunk) - Management believes the market value of its office properties is **significantly less than their carrying value**, which could result in a material impairment charge if they are reclassified as held for sale[174](index=174&type=chunk) [Legal Proceedings](index=24&type=section&id=Item%203.%20Legal%20Proceedings) Significant litigation details are incorporated by reference from the notes to the consolidated financial statements - For a description of significant litigation to which the company is a party, refer to Note 16 to the consolidated financial statements[31](index=31&type=chunk)[445](index=445&type=chunk) [Mine Safety Disclosures](index=24&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company's business - Not applicable[416](index=416&type=chunk) PART II [Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities](index=25&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity%2C%20Related%20Stockholder%20Matters%2C%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's stock trades on Nasdaq (CACC), and it actively repurchases shares under a board-authorized program - The company's common stock is traded on The Nasdaq Global Select Market under the symbol "CACC"[35](index=35&type=chunk)[417](index=417&type=chunk) Stock Repurchases for Q4 2022 | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Oct 1 - Oct 31, 2022 | — | $ — | | Nov 1 - Nov 30, 2022 | — | $ — | | Dec 1 - Dec 31, 2022 | 207,769 | $455.68 | | **Total** | **207,769** | **$455.68** | - Repurchases are conducted under the September 2021 Authorization, which allows for the repurchase of up to two million shares and has no specified expiration date[420](index=420&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=27&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Net income decreased significantly in 2022 due to a higher provision for credit losses from declining loan performance [Overview](index=28&type=section&id=Overview) Net income fell sharply in 2022, driven by a large increase in the provision for credit losses despite loan volume growth Key Financial Results (2022 vs. 2021) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net Income | $535.8M | $958.3M | | Diluted EPS | $39.32 | $59.52 | - Key operational highlights for 2022 included a decrease in forecasted collection rates, an increase in consumer loan assignment volume, and the repurchase of **10.4% of shares outstanding**[40](index=40&type=chunk) [Consumer Loan Metrics](index=29&type=section&id=Consumer%20Loan%20Metrics) Forecasted collection rates for recent loan vintages declined in 2022, while overall loan volume increased Forecasted Collection Rates by Assignment Year | Assignment Year | Dec 31, 2022 Forecast | Initial Forecast | Variance from Initial | | :--- | :--- | :--- | :--- | | 2018 | 65.2% | 63.6% | +1.6% | | 2019 | 66.6% | 64.0% | +2.6% | | 2020 | 67.8% | 63.4% | +4.4% | | 2021 | 66.2% | 66.3% | -0.1% | | 2022 | 66.3% | 67.5% | -1.2% | Change in Forecasted Net Cash Flows (in millions) | Year | Dealer Loans | Purchased Loans | Total | | :--- | :--- | :--- | :--- | | 2022 | $(41.6) | $(18.1) | $(59.7) | | 2021 | $87.7 | $238.4 | $326.1 | | 2020 | $(41.1) | $(5.2) | $(46.3) | Consumer Loan Volume Changes (YoY) | Metric | 2022 vs 2021 | 2021 vs 2020 | | :--- | :--- | :--- | | Unit Volume | +4.4% | -21.4% | | Dollar Volume | +14.5% | -13.0% | | Active Dealers | +4.3% | -10.1% | [Results of Operations (2022 vs. 2021)](index=35&type=section&id=Results%20of%20Operations%20(2022%20vs.%202021)) A surge in the provision for credit losses drove a significant increase in expenses and a sharp decline in pre-tax income - Finance charges decreased by **$56.3 million (3.2%)** due to a lower average net loans receivable balance[438](index=438&type=chunk)[466](index=466&type=chunk) - Provision for credit losses increased by **$473.0 million**, primarily due to a $494.4 million negative swing in forecast changes, reflecting deteriorating loan performance[86](index=86&type=chunk)[114](index=114&type=chunk)[146](index=146&type=chunk) - Operating expenses increased by **$42.6 million (11.1%)**, mainly driven by a $43.9 million rise in salaries and wages[467](index=467&type=chunk) - Other income increased by **$30.3 million (57.1%)**, primarily due to a $20.4 million increase in ancillary product profit sharing income[85](index=85&type=chunk) [Critical Accounting Estimates](index=37&type=section&id=Critical%20Accounting%20Estimates) The allowance for credit losses is the most significant estimate, relying on complex models to forecast future cash flows - The estimation of the amount and timing of future collections and Dealer Holdback payments is a **critical accounting estimate** impacting multiple financial statement line items[88](index=88&type=chunk)[470](index=470&type=chunk) - In Q1 2022, the company removed its COVID-19 forecast adjustment and enhanced its forecasting methodology, which **reduced the provision for credit losses by $70.6 million**[90](index=90&type=chunk)[117](index=117&type=chunk)[472](index=472&type=chunk) - A **1% decline** in forecasted future net cash flows on loans as of December 31, 2022, would have reduced 2022 consolidated net income by approximately **$45.9 million**[502](index=502&type=chunk) [Liquidity and Capital Resources](index=40&type=section&id=Liquidity%20and%20Capital%20Resources) The company funds its business through operating cash flows and various debt instruments, maintaining ample liquidity - Primary sources of capital are cash flows from operations and borrowings under a revolving secured line of credit, Warehouse facilities, Term ABS financings, and senior notes[122](index=122&type=chunk) - During 2022, the company completed new Term ABS financings totaling over **$900 million** and extended several other credit facilities[95](index=95&type=chunk)[506](index=506&type=chunk)[507](index=507&type=chunk) Material Financial Obligations as of Dec 31, 2022 (in millions) | Obligation | In less than 12 months | In 12 months or more | Total | | :--- | :--- | :--- | :--- | | Long-term debt | $1,507.9 | $3,108.6 | $4,616.5 | | Dealer Holdback | $215.7 | $741.5 | $957.2 | | Operating lease obligations | $0.7 | $0.7 | $1.4 | | Purchase obligations | $2.7 | $7.1 | $9.8 | | **Total** | **$1,727.0** | **$3,857.9** | **$5,584.9** | [Quantitative and Qualitative Disclosures About Market Risk](index=42&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk is interest rate fluctuation on its floating-rate debt, which is actively managed - The company is primarily exposed to market risks from movements in interest rates on its **floating-rate debt**[126](index=126&type=chunk)[480](index=480&type=chunk) - For every **100-basis-point increase** in interest rates on its revolving secured line of credit, annual after-tax earnings would decrease by approximately **$0.2 million**[97](index=97&type=chunk) - For every **100-basis-point increase** in interest rates on Term ABS 2021-1 (up to a 5.50% cap), annual after-tax earnings would decrease by approximately **$0.8 million**[98](index=98&type=chunk) - For every **100-basis-point increase** in interest rates on Term ABS 2022-2 (up to a 6.50% cap), annual after-tax earnings would decrease by approximately **$1.5 million**[482](index=482&type=chunk) [Financial Statements and Supplementary Data](index=43&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section contains the company's audited consolidated financial statements and accompanying notes for fiscal year 2022 [Consolidated Financial Statements](index=47&type=section&id=Consolidated%20Financial%20Statements) The statements show total assets of $6.9 billion and net income of $535.8 million for the year ended December 31, 2022 Consolidated Balance Sheet Data (in millions) | Account | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $7.7 | $23.3 | | Loans receivable, net | $6,297.7 | $6,336.3 | | **Total Assets** | **$6,904.7** | **$7,050.9** | | **Liabilities & Equity** | | | | Secured financing | $3,756.4 | $3,811.5 | | Senior notes | $794.5 | $792.5 | | **Total Liabilities** | **$5,280.7** | **$5,226.7** | | **Total Shareholders' Equity** | **$1,624.0** | **$1,824.2** | Consolidated Income Statement Data (in millions) | Account | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total revenue | $1,832.4 | $1,856.0 | $1,669.3 | | Provision for credit losses | $481.4 | $8.4 | $556.9 | | Total costs and expenses | $1,120.7 | $595.1 | $1,119.8 | | **Net income** | **$535.8** | **$958.3** | **$421.0** | | **Diluted EPS** | **$39.32** | **$59.52** | **$23.47** | Consolidated Cash Flow Data (in millions) | Activity | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | $1,238.7 | $1,069.4 | $985.2 | | Net cash from (used in) investing activities | $(460.6) | $437.3 | $(673.5) | | Net cash used in financing activities | $(794.6) | $(1,468.7) | $(433.2) | [Notes to Consolidated Financial Statements](index=54&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes detail accounting policies, loan data, debt facilities, and significant legal and regulatory contingencies - **Note 2 (Accounting Policies):** The company adopted the CECL standard on Jan 1, 2020, using different accounting methods for pre- and post-adoption loans[155](index=155&type=chunk)[213](index=213&type=chunk) - **Note 5 (Loans Receivable):** Provides a detailed reconciliation of the changes in the Loans Receivable and Allowance for Credit Losses balances for 2022, 2021, and 2020[566](index=566&type=chunk)[578](index=578&type=chunk)[605](index=605&type=chunk) - **Note 9 (Debt):** Details the company's various debt facilities, including a **$410.0 million** revolving credit line, five warehouse facilities totaling **$1.175 billion**, and **$800.0 million** in senior notes[635](index=635&type=chunk)[636](index=636&type=chunk)[638](index=638&type=chunk) - **Note 16 (Contingencies):** Describes significant ongoing legal and regulatory matters, including the joint complaint by the NY AG and CFPB, and investigations by the DOJ and other state attorneys general[725](index=725&type=chunk)[727](index=727&type=chunk)[757](index=757&type=chunk) [Controls and Procedures](index=95&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management and the independent auditor concluded that the company's disclosure controls and internal controls were effective - Management concluded that the company's disclosure controls and procedures were **effective** as of the end of the period covered by the report[513](index=513&type=chunk) - There were **no material changes** in internal control over financial reporting during the fourth quarter of 2022[514](index=514&type=chunk) - The independent registered public accounting firm, Grant Thornton LLP, provided an **unqualified opinion** on the effectiveness of the company's internal control over financial reporting as of December 31, 2022[519](index=519&type=chunk)[522](index=522&type=chunk)

Financial Data and Key Metrics Changes - Adjusted net income decreased by 26.6% from Q4 2021 to $156 million [33] - Adjusted earnings per share decreased by 17.7% from Q4 2021 to $11.74 [33] - Unit and dollar volumes grew by 25.6% and 26.2%, respectively, compared to Q4 2021 [42] Business Line Data and Key Metrics Changes - The provision expense for new loans was $60 million in Q4, which is lower than the previous quarter [4] - Forecasted collection rates for loans originated in 2021 and 2022 decreased, leading to a decline in forecasted net cash flows from the loan portfolio by $41 million or 0.5% [42] Market Data and Key Metrics Changes - The competitive environment has improved, with a more constructive market tone observed in January [7][38] - Funding markets for subprime ABS have shown signs of recovery, with spreads lower than late last year [5][6] Company Strategy and Development Direction - The company intends to tap the ABS market at the appropriate time, leveraging its strong liquidity position with $1.6 billion in unused availability at committed revolving credit facilities [10] - The company emphasizes maintaining a significant margin of safety in loan pricing to address uncertainties in the market [63] Management's Comments on Operating Environment and Future Outlook - Management noted that inflation and declining vehicle values have impacted loan performance, which has been worse than expected over the last few quarters [48] - The company is cautious about the future, acknowledging that used car prices remain elevated and the market is not yet stabilized [62] Other Important Information - The company disagrees with the allegations in the pending lawsuit and intends to vigorously defend itself [12][14] - The company has been proactive in adjusting pricing and risk assessments to maintain profitability amid economic uncertainties [65] Q&A Session Summary Question: What is the outlook for the competitive environment? - Management indicated that the competitive environment could become more intense if funding markets remain constructive [7] Question: Why not tap the ABS market given the origination growth? - Management stated they intend to tap the ABS market but currently have a strong liquidity position [10] Question: What are the implications of the lawsuit on accessing the securitization market? - Management confirmed that there is nothing in the lawsuit that would prohibit them from accessing the securitization market [22] Question: How does the company view the impact of inflation and vehicle values on loan performance? - Management believes inflation and declining vehicle values are primary factors affecting loan performance [48] Question: What adjustments are being made to pricing and risk assessments? - Management is adjusting pricing and maintaining margins to protect profitability amid economic changes [65]

Credit Acceptance Corporation (NASDAQ:CACC) Q3 2022 Earnings Conference Call November 1, 2022 5:00 PM ET Company Participants Doug Busk - Chief Treasury Officer Conference Call Participants Moshe Orenbuch - Credit Suisse John Rowan - Janney Montgomery Scott Rob Wildhack - Autonomous Research Jason Hahn - Principal Global Investors Operator Good day, everyone, and welcome to Credit Acceptance Corporation Third Quarter 2022 Earnings Call. Today's call is being recorded. A webcast and transcript of today's ear ...

Financial Performance - For the three months ended September 30, 2022, consolidated net income was $86.8 million, or $6.49 per diluted share, a decrease from $250.0 million, or $15.79 per diluted share, for the same period in 2021[226] - For the nine months ended September 30, 2022, consolidated net income was $408.5 million, or $29.74 per diluted share, down from $740.7 million, or $44.73 per diluted share, for the same period in 2021[227] - Net income for the three months ended September 30, 2022, was $86.8 million, down 65.3% from $250.0 million in the same period last year[259] - Net income for the nine months ended September 30, 2022, was $408.5 million, down $332.2 million or -44.8% from $740.7 million in 2021[270] - Total revenue for the three months ended September 30, 2022, was $460.3 million, a decrease of 2.1% from $470.1 million in 2021[259] - Total revenue for the nine months ended September 30, 2022, was $1,373.4 million, a decrease of $19.4 million or -1.4% compared to $1,392.8 million in 2021[270] Consumer Loan Performance - Consumer Loan assignment volume grew, with unit and dollar volumes increasing by 29.3% and 32.1%, respectively, compared to the third quarter of 2021[226] - The average Consumer Loan assignment for 2022 was $27,197, with an average advance of $12,938 and an initial loan term of 59 months[235] - The company experienced a decline in Consumer Loan assignment unit volume of 0.4% for the nine months ended September 30, 2022, while dollar volume grew by 11.5%[227] - Forecasted profitability per Consumer Loan assignment significantly exceeded initial estimates for loans assigned in 2018 through 2020[226] - Consumer Loan unit volume for the three months ended September 30, 2022, was 71,937, a 29.3% increase from 55,620 in 2021[252] - Consumer Loan unit volume from new active Dealers rose to 2,522, a 70.9% increase compared to 1,476 in the prior year[253] Collection Rates and Forecasts - Forecasted collection rates for Consumer Loans assigned in 2022 were 66.5% as of September 30, 2022, down from an initial forecast of 67.4%[231] - The forecasted collection rate for Consumer Loans in 2022 is 66.5%, with an advance rate of 47.6% and a spread of 18.9%[238] - The spread between the forecasted collection rate and the advance rate has ranged from 18.9% to 25.8% over the last 10 years, with a decrease from 2021 to 2022 primarily due to lower performance of 2022 Consumer Loans[239] - The forecasted collection rates for Dealer Loans and Purchased Loans as of September 30, 2022, were 66.1% and 67.3%, respectively, with corresponding advance rates of 46.5% and 50.1%[243] - The risk of a material change in the forecasted collection rate declines as Consumer Loans age, with over 90% of expected collections realized for loans from 2018 and prior[238] Expenses and Provisions - Total costs and expenses for the three months ended September 30, 2022, were $338.2 million, a significant increase of 145.3% from $137.9 million in 2021[259] - Provision for credit losses increased by $188.6 million, reflecting changes in forecasted credit losses[263] - The total provision for credit losses reached $351.1 million, reflecting an increase of $368.6 million primarily due to forecast changes[275] - Provision for credit losses for new Consumer Loan assignments increased to $283.5 million in 2022 from $298.9 million in 2021, a change of $(15.4) million[276] - Operating expenses increased by $43.2 million or 15.5%, primarily due to a $45.8 million increase in salaries and wages[274] Debt and Financing - The funded debt to equity ratio was 2.9 to 1 as of September 30, 2022, indicating the company's strategy to maintain modest financial leverage[247] - Total balance sheet indebtedness increased to $4,625.9 million as of September 30, 2022, from $4,616.3 million as of December 31, 2021, primarily due to stock repurchases[289] - Scheduled principal debt maturities total $4,647.3 million as of September 30, 2022, with $1,608.8 million due in 2023 and $1,293.8 million due in 2024[290] - The company completed a $350.0 million Term ABS financing on June 16, 2022, with an expected annualized cost of approximately 5.4%[285] - The maturity of the revolving secured line of credit facility was extended from June 22, 2024, to June 22, 2025, with a net decrease in the facility amount from $435.0 million to $410.0 million[287] Operational Adjustments - The company is considering options to further reduce office space, which may include the sale of one or both of its buildings in Southfield, Michigan[281] - Management believes that cash flows from operations and various financing alternatives will provide sufficient financing for debt maturities and future operations[291] - The company had $1,171.1 million in unused and available lines of credit as of September 30, 2022[289] - The company removed the COVID forecast adjustment in Q1 2022, resulting in an increase of $149.5 million in forecasted net cash flows[294] - The implementation of enhanced forecasting methodology led to a total increase of $95.7 million in forecasted net cash flows[294]

Financial Data and Key Metrics Changes - Unit and dollar volumes grew by 5.1% and 22% respectively compared to Q2 2021 [5] - Adjusted net income decreased by 18% from Q2 2021 to $188 million [5] - Adjusted earnings per share increased by 1.5% from Q2 2021 to $13.92 [5] Business Line Data and Key Metrics Changes - The adjusted yield on the portfolio increased due to better loan performance in Q1, although Q2 performance slightly underperformed expectations [10][12] - The company experienced a decrease in forecasted collection rates for loans originated from 2020 to 2022, impacting net cash flows by $43 million [5] Market Data and Key Metrics Changes - Used car prices remain elevated, but there is potential for a future decline, which could impact the company's portfolio [18] - The competitive landscape appears to have improved, as indicated by increased volume per dealer and anecdotal feedback from sales teams [37] Company Strategy and Development Direction - The company is focused on accurately forecasting collection rates and making necessary adjustments to its business model [22] - Management is monitoring the capital markets closely and factoring changes into business operations [26] Management Comments on Operating Environment and Future Outlook - Management noted that inflation is a headwind affecting consumers' ability to pay, which could impact future loan performance [13][44] - The company is in an unusual environment with high inflation and the absence of government stimulus, making it difficult to predict when conditions will normalize [21] Other Important Information - The company repurchased approximately 404,000 shares, representing 3% of shares outstanding at the beginning of the quarter [6] - A $12 million expense was related to settling a previously disclosed class action lawsuit [6] Q&A Session Summary Question: How to understand the increase in adjusted revenue or yield? - Management explained that the adjusted yield increased due to better loan performance in Q1, but Q2 performance slightly underperformed expectations [10][12] Question: Is inflation impacting loan performance? - Management indicated that inflation and the end of government support programs are likely contributing to underperformance in loan collections [12][13] Question: Are there adjustments being made to the business model? - Management stated they continuously forecast collection rates and make necessary adjustments, but do not disclose specific changes [22] Question: How is the competitive landscape affecting the company? - Management noted an improvement in the competitive landscape, likely due to changes in interest rates and market conditions [37] Question: Are there any changes in business practices due to legal settlements? - Management confirmed that no significant changes were required in business practices following recent settlements [34] Question: What is the impact of capital markets on business operations? - Management acknowledged that the capital markets are functioning differently than in the past, and they are closely monitoring these changes [26]

[PART I. — FINANCIAL INFORMATION](index=3&type=section&id=PART%20I.%20%E2%80%94%20FINANCIAL%20INFORMATION) This part provides the unaudited consolidated financial statements, including balance sheets, income statements, cash flows, and detailed notes on accounting policies and financial instruments [ITEM 1. FINANCIAL STATEMENTS](index=3&type=section&id=ITEM%201.%20FINANCIAL%20STATEMENTS) This section presents the unaudited consolidated financial statements, including balance sheets, income statements, cash flows, and comprehensive notes on accounting policies and financial instruments [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) The consolidated balance sheet shows a slight decrease in total assets and shareholders' equity, with an increase in total liabilities from December 2021 to June 2022 **Consolidated Balance Sheet Highlights (in millions)** | Metric | June 30, 2022 | December 31, 2021 | | :----- | :------------ | :---------------- | | Total Assets | $6,978.5 | $7,050.9 | | Loans receivable, net | $6,323.7 | $6,336.3 | | Total Liabilities | $5,458.4 | $5,226.7 | | Revolving secured line of credit | $220.7 | $2.6 | | Total Shareholders' Equity | $1,520.1 | $1,824.2 | [Consolidated Statements of Income](index=4&type=section&id=Consolidated%20Statements%20of%20Income) Net income significantly declined for both three and six months ended June 30, 2022, due to increased credit loss provisions and operating expenses **Consolidated Statements of Income Highlights (in millions, except per share data)** | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :----- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Total Revenue | $457.4 | $471.7 | $913.1 | $922.7 | | Provision for credit losses | $147.5 | $(30.5) | $170.8 | $(9.2) | | Total costs and expenses | $315.3 | $92.0 | $486.5 | $278.7 | | Net income | $107.4 | $288.6 | $321.7 | $490.7 | | Diluted Net income per share | $7.94 | $17.18 | $23.10 | $28.96 | [Consolidated Statements of Comprehensive Income](index=5&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) Comprehensive income for both periods ended June 30, 2022, was negatively impacted by unrealized losses on securities, net of tax **Consolidated Statements of Comprehensive Income (in millions)** | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :----- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net income | $107.4 | $288.6 | $321.7 | $490.7 | | Unrealized loss on securities, net of tax | $(0.7) | — | $(2.4) | $(0.7) | | Comprehensive income | $106.7 | $288.6 | $319.3 | $490.0 | [Consolidated Statements of Shareholders' Equity](index=7&type=section&id=Consolidated%20Statements%20of%20Shareholders%27%20Equity) Shareholders' equity significantly decreased from December 2021 to June 2022, mainly due to common stock repurchases and accumulated other comprehensive loss **Consolidated Statements of Shareholders' Equity Highlights (in millions)** | Metric | June 30, 2022 | December 31, 2021 | | :----- | :------------ | :---------------- | | Balance, beginning of period (Six Months) | $1,824.2 | $2,302.5 | | Net income (Six Months) | $321.7 | $490.7 | | Repurchase of common stock (Six Months) | $(652.7) | $(389.7) | | Accumulated other comprehensive income (loss) (Six Months) | $(2.2) | $1.6 | | Balance, end of period (June 30, 2022) | $1,520.1 | $2,393.0 (June 30, 2021) | [Consolidated Statements of Cash Flows](index=8&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Net cash from operating activities decreased, investing activities used cash, and financing activities significantly increased cash usage for the six months ended June 30, 2022 **Consolidated Statements of Cash Flows Highlights (in millions)** | Metric | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :----- | :--------------------------- | :--------------------------- | | Net cash provided by operating activities | $625.6 | $668.5 | | Net cash provided by (used in) investing activities | $(166.4) | $21.6 | | Net cash used in financing activities | $(462.6) | $(225.4) | | Repurchase of common stock | $(652.7) | $(389.7) | | Borrowings under revolving secured line of credit | $3,876.1 | $994.2 | | Repayments under revolving secured line of credit | $(3,658.0) | $(1,090.1) | [Notes to Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) This section provides detailed notes explaining the basis of financial statement presentation, business description, significant accounting policies, and other financial instrument details [1. BASIS OF PRESENTATION](index=9&type=section&id=1.%20BASIS%20OF%20PRESENTATION) Unaudited consolidated financial statements are prepared under GAAP for interim reporting, using management estimates, with no subsequent events requiring disclosure - The accompanying unaudited consolidated financial statements are prepared in accordance with GAAP for interim financial information, including normal recurring accruals[23](index=23&type=chunk) - Management makes estimates and assumptions that affect the amounts reported, and actual results could differ from these estimates[24](index=24&type=chunk) - No events or transactions occurring subsequent to June 30, 2022, were identified that would require disclosure or adjustment[25](index=25&type=chunk) [2. DESCRIPTION OF BUSINESS](index=9&type=section&id=2.%20DESCRIPTION%20OF%20BUSINESS) Credit Acceptance provides auto financing programs to dealers, serving consumers across various credit histories through Portfolio and Purchase programs - Credit Acceptance has offered financing programs since 1972, enabling automobile dealers to sell vehicles to consumers regardless of their credit history[26](index=26&type=chunk) **Consumer Loan Assignment Volume - Percentage with FICO® scores below 650 or no FICO® scores** | Period | 2022 | 2021 | | :----- | :--- | :--- | | Three Months Ended June 30 | 84.6% | 92.7% | | Six Months Ended June 30 | 86.3% | 93.6% | - The company has two programs: the Portfolio Program (advances money to Dealers for servicing rights) and the Purchase Program (buys Consumer Loans from Dealers)[32](index=32&type=chunk) - In Q4 2021, the company made available an option to all Dealers that expanded financing programs to consumers with higher credit ratings, contributing to a reduction in the percentage of total unit volume with lower FICO scores[29](index=29&type=chunk) [3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES](index=11&type=section&id=3.%20SUMMARY%20OF%20SIGNIFICANT%20ACCOUNTING%20POLICIES) This section details key accounting policies, including business segment, cash, restricted securities, loan recognition, CECL, finance charges, reinsurance, and new accounting updates [Business Segment Information](index=11&type=section&id=Business%20Segment%20Information) The company operates as a single reportable segment, providing financing programs to automobile dealers - The company operates in one reportable segment, representing its core business of offering financing programs to Dealers[45](index=45&type=chunk) [Cash and Cash Equivalents and Restricted Cash and Cash Equivalents](index=11&type=section&id=Cash%20and%20Cash%20Equivalents%20and%20Restricted%20Cash%20and%20Cash%20Equivalents) Cash equivalents are highly liquid, while restricted cash is pledged collateral for financings and held in trust for service contract claims - Cash equivalents consist of readily marketable securities with original maturities of three months or less[46](index=46&type=chunk) - Restricted cash and cash equivalents are pledged as collateral for secured financings and held in a trust for future vehicle service contract claims[47](index=47&type=chunk) **Cash and Cash Equivalents and Restricted Cash (in millions)** | Metric | June 30, 2022 | December 31, 2021 | | :----- | :------------ | :---------------- | | Cash and cash equivalents | $4.1 | $23.3 | | Restricted cash and cash equivalents | $426.7 | $410.9 | | Total | $430.8 | $434.2 | [Restricted Securities Available for Sale](index=12&type=section&id=Restricted%20Securities%20Available%20for%20Sale) Restricted securities available for sale are held in trust for service contract claims, valued at fair value with unrealized gains/losses in comprehensive income - Restricted securities available for sale consist of amounts held in a trust for future vehicle service contract claims[51](index=51&type=chunk) - These debt securities are classified as available for sale and stated at fair value, with unrealized gains and losses, net of income taxes, included in comprehensive income and reported as a component of shareholders' equity[51](index=51&type=chunk) [Loans Receivable and Allowance for Credit Losses](index=12&type=section&id=Loans%20Receivable%20and%20Allowance%20for%20Credit%20Losses) The loan portfolio includes Dealer and Purchased Loans, with CECL adopted in 2020, and credit quality is monitored monthly against forecasted collection rates - The Loan portfolio consists of two segments: Dealer Loans (lender to Dealers) and Purchased Loans (purchaser of Consumer Loans), which have different levels of risk in relation to credit losses[54](index=54&type=chunk) - On January 1, 2020, the company adopted the current expected credit loss model (CECL). Loans outstanding prior to adoption use the PCD Method, while subsequent assignments use the Originated Method[58](index=58&type=chunk)[60](index=60&type=chunk) - Under the Originated Method, at the time of assignment, an allowance for credit losses is recorded equal to the difference between the initial Loan receivable balance and the present value of expected future net cash flows[61](index=61&type=chunk) - The allowance for credit losses represents the amount required to reduce the net carrying amount of Loans to the present value of expected future net cash flows discounted at the effective interest rate[68](index=68&type=chunk) - Credit quality is monitored and evaluated monthly by comparing current forecasted collection rates to initial expectations, with adjustments made for recent trends and economic conditions[74](index=74&type=chunk) - During Q1 2022, the company removed the COVID forecast adjustment and enhanced its methodology for forecasting future net cash flows, which impacted the provision for credit losses[76](index=76&type=chunk) [Finance Charges](index=15&type=section&id=Finance%20Charges) Finance charges include interest income, administrative fees from ancillary products, and program fees, recognized on a level-yield basis over loan life - Finance charges are comprised of interest income on Loans, administrative fees from ancillary products, program fees charged to Dealers, Consumer Loan assignment fees, and direct origination costs[77](index=77&type=chunk) - The company provides Dealers the ability to offer vehicle service contracts (VSC) and Guaranteed Asset Protection (GAP) to consumers through Third Party Providers (TPPs), retaining administrative fees[78](index=78&type=chunk)[81](index=81&type=chunk) - Finance charges are recognized on a level-yield basis over the life of the Loan by applying the effective interest rate to the net carrying amount[83](index=83&type=chunk) [Reinsurance](index=17&type=section&id=Reinsurance) VSC Re, a subsidiary, reinsures vehicle service contracts, recognizing premiums over policy life and consolidating trust assets and liabilities - VSC Re, a wholly owned subsidiary, reinsures coverage under vehicle service contracts sold to consumers by Dealers[87](index=87&type=chunk) - Premiums from reinsurance are recognized over the life of the policy in proportion to expected costs, and claims are expensed through a provision for claims in the period incurred[88](index=88&type=chunk) - The trust assets and related reinsurance liabilities are consolidated within the financial statements because the company is the primary beneficiary of the variable interest entity[89](index=89&type=chunk) [New Accounting Update Not Yet Adopted](index=17&type=section&id=New%20Accounting%20Update%20Not%20Yet%20Adopted) The company is assessing the impact of ASU 2022-02 on troubled debt restructurings and vintage disclosures, effective after December 15, 2022 - ASU 2022-02, 'Troubled Debt Restructurings and Vintage Disclosures,' is effective for fiscal years, and interim periods, beginning after December 15, 2022[90](index=90&type=chunk) - The company has not yet adopted ASU 2022-02 and is currently assessing its impact on consolidated financial statements and related disclosures[90](index=90&type=chunk) [4. FAIR VALUE OF FINANCIAL INSTRUMENTS](index=18&type=section&id=4.%20FAIR%20VALUE%20OF%20FINANCIAL%20INSTRUMENTS) Fair values of financial instruments are estimated using Level 1, 2, or 3 methods, with net loans receivable being a Level 3 measurement - The carrying amounts of Cash and Cash Equivalents and Restricted Cash and Cash Equivalents approximate their fair value due to short maturity[93](index=93&type=chunk) - The fair value of Loans Receivable, net, is determined by calculating the present value of expected future net cash flows using the discount rate from the non-GAAP floating yield methodology[95](index=95&type=chunk) - Fair value measurements are grouped into three levels: Level 1 (quoted prices in active markets), Level 2 (observable inputs), and Level 3 (unobservable assumptions)[101](index=101&type=chunk)[102](index=102&type=chunk)[103](index=103&type=chunk) **Fair Value Measurement Levels (in millions) as of June 30, 2022** | Asset/Liability | Level 1 | Level 2 | Level 3 | Total Fair Value | | :-------------- | :------ | :------ | :------ | :--------------- | | Cash and cash equivalents | $4.1 | — | — | $4.1 | | Restricted cash and cash equivalents | $426.7 | — | — | $426.7 | | Restricted securities available for sale | $52.5 | $13.5 | — | $66.0 | | Loans receivable, net | — | — | $6,643.1 | $6,643.1 | | Revolving secured line of credit | — | $220.7 | — | $220.7 | | Secured financing | — | $3,660.2 | — | $3,660.2 | | Senior notes | $761.0 | — | — | $761.0 | | Mortgage note | — | $9.2 | — | $9.2 | [5. RESTRICTED SECURITIES AVAILABLE FOR SALE](index=20&type=section&id=5.%20RESTRICTED%20SECURITIES%20AVAILABLE%20FOR%20SALE) Restricted securities available for sale, primarily corporate and government bonds, had a fair value of **$66.0 million** with **$2.8 million** in unrealized losses as of June 30, 2022 **Restricted Securities Available for Sale (in millions)** | Type | Amortized Cost (June 30, 2022) | Estimated Fair Value (June 30, 2022) | Gross Unrealized Losses (June 30, 2022) | | :--- | :----------------------------- | :----------------------------------- | :-------------------------------------- | | Corporate bonds | $28.6 | $27.1 | $(1.5) | | U.S. Government and agency securities | $26.4 | $25.4 | $(1.0) | | Asset-backed securities | $11.8 | $11.5 | $(0.3) | | Commercial paper | $1.7 | $1.7 | — | | Mortgage-backed securities | $0.3 | $0.3 | — | | **Total** | **$68.8** | **$66.0** | **$(2.8)** | **Contractual Maturity of Debt Securities (in millions) as of June 30, 2022** | Maturity Period | Amortized Cost | Estimated Fair Value | | :-------------- | :------------- | :------------------- | | Within one year | $6.3 | $6.2 | | Over one year to five years | $60.4 | $57.8 | | Over five years to ten years | $2.0 | $1.9 | | Over ten years | $0.1 | $0.1 | | **Total** | **$68.8** | **$66.0** | [6. LOANS RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES](index=21&type=section&id=6.%20LOANS%20RECEIVABLE%20AND%20ALLOWANCE%20FOR%20CREDIT%20LOSSES) Net loans receivable slightly decreased to **$6,323.7 million**, with a significant increase in provision for credit losses due to declining loan performance and forecasting changes **Loans Receivable and Allowance for Credit Losses (in millions)** | Metric | June 30, 2022 | December 31, 2021 | | :----- | :------------ | :---------------- | | Loans receivable | $9,190.6 | $9,349.8 | | Allowance for credit losses | $(2,866.9) | $(3,013.5) | | Loans receivable, net | $6,323.7 | $6,336.3 | **Provision for Credit Losses (in millions)** | Component | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :-------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | New Consumer Loan assignments | $97.5 | $91.6 | $200.1 | $223.4 | | Forecast changes | $50.0 | $(122.1) | $(29.3) | $(232.6) | | **Total** | **$147.5** | **$(30.5)** | **$170.8** | **$(9.2)** | - The increase in provision for credit losses related to forecast changes was primarily due to a decline in Consumer Loan performance during Q2 2022 compared to an improvement in Q2 2021[268](index=268&type=chunk) - During Q1 2022, the company removed the COVID forecast adjustment and enhanced its forecasting methodology, which increased forecasted net cash flows by **$95.7 million** and reduced provision for credit losses by **$70.6 million**[140](index=140&type=chunk)[298](index=298&type=chunk) [Credit Quality](index=27&type=section&id=Credit%20Quality) Consumer Loan collection rates are monitored monthly, showing declines for recent assignments in Q2 2022, with risk decreasing as loans age - Credit quality of Consumer Loans is monitored and evaluated monthly by comparing current forecasted collection rates to prior forecasts and initial expectations[130](index=130&type=chunk) - For the three months ended June 30, 2022, forecasted collection rates declined for Consumer Loans assigned in 2020 through 2022[230](index=230&type=chunk) - For the six months ended June 30, 2022, forecasted collection rates improved for Consumer Loans assigned in 2014, 2016, 2017, and 2019 through 2021, but declined for 2022 Consumer Loans[230](index=230&type=chunk) - The risk of a material change in forecasted collection rates declines as Consumer Loans age; for 2017 and prior assignments, over **90%** of expected collections have been realized[240](index=240&type=chunk) [7. REINSURANCE](index=30&type=section&id=7.%20REINSURANCE) VSC Re's reinsurance activity shows decreased net premiums earned and increased claims provision, with rising trust assets and reserves **Reinsurance Activity (in millions)** | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :----- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net assumed written premiums | $19.1 | $15.1 | $36.8 | $33.8 | | Net premiums earned | $15.4 | $15.8 | $29.2 | $30.2 | | Provision for claims | $12.2 | $10.3 | $21.1 | $19.3 | **Trust Assets and Reinsurance Liabilities (in millions) as of June 30, 2022** | Metric | Balance Sheet Location | Amount | | :----- | :--------------------- | :----- | | Restricted cash and cash equivalents | Restricted cash and cash equivalents | $1.0 | | Restricted securities available for sale | Restricted securities available for sale | $66.0 | | Unearned premium | Accounts payable and accrued liabilities | $52.2 | | Claims reserve | Accounts payable and accrued liabilities | $2.9 | [8. OTHER INCOME](index=31&type=section&id=8.%20OTHER%20INCOME) Other income significantly increased for both periods ended June 30, 2022, primarily due to higher ancillary product profit sharing **Other Income (in millions)** | Source | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :----- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Ancillary product profit sharing | $12.9 | $7.2 | $27.6 | $15.4 | | Remarketing fees | $1.9 | $1.9 | $3.9 | $4.1 | | Dealer enrollment fees | $0.7 | $0.7 | $1.1 | $1.1 | | Interest | $0.7 | $0.4 | $1.0 | $0.7 | | **Total** | **$16.4** | **$10.5** | **$34.2** | **$22.2** | - The increase in other income was primarily due to an increase in ancillary product profit sharing income, driven by a decrease in average claim rates on Guaranteed Asset Protection contracts[264](index=264&type=chunk) **Other Income by Timing of Revenue Recognition (in millions) for Six Months Ended June 30, 2022** | Timing of Revenue Recognition | Amount | | :---------------------------- | :----- | | Over time | $29.7 | | At a point in time | $4.5 | | **Total** | **$34.2** | [9. DEBT](index=33&type=section&id=9.%20DEBT) Total debt increased to **$4,792.2 million** as of June 30, 2022, utilizing diverse financing sources, with the company in compliance with all debt covenants **Debt Composition (in millions)** | Debt Type | Principal Outstanding (June 30, 2022) | Carrying Amount (June 30, 2022) | Principal Outstanding (Dec 31, 2021) | Carrying Amount (Dec 31, 2021) | | :-------- | :------------------------------------ | :------------------------------ | :----------------------------------- | :----------------------------- | | Revolving secured line of credit | $220.7 | $220.7 | $2.6 | $2.6 | | Secured financing | $3,786.4 | $3,768.9 | $3,830.4 | $3,811.5 | | Senior notes | $800.0 | $793.4 | $800.0 | $792.5 | | Mortgage note | $9.2 | $9.2 | $9.7 | $9.7 | | **Total debt** | **$4,816.3** | **$4,792.2** | **$4,642.7** | **$4,616.3** | - On June 16, 2022, the company completed a **$350.0 million** Term ABS financing[290](index=290&type=chunk) - On June 16, 2022, the revolving maturity date for Warehouse Facility IV was extended from November 17, 2023, to May 20, 2025[291](index=291&type=chunk) - On June 22, 2022, the maturity of the revolving secured line of credit facility was extended from June 22, 2024, to June 22, 2025, and the facility amount was adjusted from **$435.0 million** to **$410.0 million**[292](index=292&type=chunk) - As of June 30, 2022, the company was in compliance with all covenants under its revolving secured line of credit facility, Warehouse facilities, Term ABS financings, and senior notes[191](index=191&type=chunk)[192](index=192&type=chunk) [Revolving Secured Line of Credit Facility](index=38&type=section&id=Revolving%20Secured%20Line%20of%20Credit%20Facility) The **$410.0 million** revolving secured line of credit facility was extended to June 2025, subject to borrowing-base limitations and asset collateralization - The company has a **$410.0 million** revolving secured line of credit facility, which will decrease by **$25.0 million** on June 22, 2023[171](index=171&type=chunk)[292](index=292&type=chunk) - The maturity date of the facility was extended from June 22, 2024, to June 22, 2025[292](index=292&type=chunk) - Borrowings are subject to an **80%** borrowing-base limitation on the value of Loans and are secured by most of the company's assets[171](index=171&type=chunk) [Warehouse Facilities](index=38&type=section&id=Warehouse%20Facilities) The company operates five Warehouse facilities with **$1,100.0 million** borrowing capacity, using pledged loans as collateral for non-recourse financing - The company has five Warehouse facilities with a total borrowing capacity of **$1,100.0 million**[172](index=172&type=chunk) - Under these facilities, Loans are contributed to wholly owned subsidiaries and pledged as collateral to lenders for non-recourse financing[172](index=172&type=chunk)[173](index=173&type=chunk) - Financing is generally limited to the lesser of **80%** of the value of contributed Loans plus restricted cash and cash equivalents, or the facility limit[172](index=172&type=chunk) [Term ABS Financings](index=39&type=section&id=Term%20ABS%20Financings) Term ABS financings involve pledging loans as collateral for notes issued to institutional investors, with non-recourse indebtedness and revolving periods - The company utilizes wholly owned subsidiaries (Funding LLCs) to complete secured financing transactions with qualified institutional investors or lenders[179](index=179&type=chunk) - Each financing has a specified revolving period for contributing additional Loans, after which the debt outstanding will begin to amortize[180](index=180&type=chunk) - The financings create indebtedness for which the trusts or Funding LLCs are liable, secured by their assets, and such indebtedness is non-recourse to the company[181](index=181&type=chunk) [Senior Notes](index=40&type=section&id=Senior%20Notes) The company holds **$400.0 million** in 5.125% senior notes due 2024 and **$400.0 million** in 6.625% senior notes due 2026, both subsidiary-guaranteed - The company issued **$400.0 million** aggregate principal amount of **5.125%** senior notes due 2024[185](index=185&type=chunk) - The company issued **$400.0 million** aggregate principal amount of **6.625%** senior notes due 2026[187](index=187&type=chunk) - Both the 2024 and 2026 senior notes are guaranteed on a senior basis by Buyers Vehicle Protection Plan, Inc. and Vehicle Remarketing Services, Inc[185](index=185&type=chunk)[187](index=187&type=chunk)[189](index=189&type=chunk) [Mortgage Note](index=40&type=section&id=Mortgage%20Note) A **$12.0 million** mortgage note, secured by a building and its leases, matures August 6, 2023, with interest at LIBOR plus 150 basis points - On August 6, 2018, the company entered into a **$12.0 million** mortgage note with a commercial bank[190](index=190&type=chunk) - The note matures on August 6, 2023, and bears interest at LIBOR plus **150 basis points**[190](index=190&type=chunk) - The mortgage note is secured by a first mortgage lien on a building acquired by the company and an assignment of all leases, rents, revenues, and profits[190](index=190&type=chunk) [Debt Covenants](index=40&type=section&id=Debt%20Covenants) As of June 30, 2022, the company complied with all debt covenants across its various financing facilities and senior notes - As of June 30, 2022, the company was in compliance with all covenants under its revolving secured line of credit facility, Warehouse facilities, Term ABS financings, and senior notes indentures[191](index=191&type=chunk)[192](index=192&type=chunk) - Covenants include maintaining certain financial ratios (e.g., net earnings to fixed charges, funded debt to tangible net worth) and measuring the performance of contributed assets[191](index=191&type=chunk)[192](index=192&type=chunk) [10. DERIVATIVE AND HEDGING INSTRUMENTS](index=41&type=section&id=10.%20DERIVATIVE%20AND%20HEDGING%20INSTRUMENTS) The company uses non-hedging interest rate cap agreements to manage interest rate risk, with their fair value significantly increasing due to rising market rates - The company utilizes interest rate cap agreements to manage the interest rate risk on certain secured financings[195](index=195&type=chunk) - These interest rate caps have not been designated as hedging instruments[196](index=196&type=chunk) **Fair Value of Interest Rate Caps (in millions)** | Date | Fair Value | | :--- | :--------- | | June 30, 2022 | $1.6 | | December 31, 2021 | $0.2 | *The increase in fair value was the result of an increase in market rates* [11. INCOME TAXES](index=42&type=section&id=11.%20INCOME%20TAXES) The effective income tax rate increased for both periods ended June 30, 2022, primarily due to higher non-deductible executive compensation **Effective Income Tax Rate** | Period | 2022 | 2021 | | :----- | :--- | :--- | | Three Months Ended June 30 | 24.4% | 24.0% | | Six Months Ended June 30 | 24.6% | 23.8% | - The increase in the effective income tax rate was primarily due to an increase in non-deductible executive compensation expenses, mainly from stock options granted under the Incentive Plan[200](index=200&type=chunk) [12. NET INCOME PER SHARE](index=43&type=section&id=12.%20NET%20INCOME%20PER%20SHARE) Basic and diluted net income per share significantly decreased for both periods ended June 30, 2022, due to lower net income and reduced shares outstanding **Net Income Per Share** | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :----- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Basic | $7.99 | $17.19 | $23.23 | $28.99 | | Diluted | $7.94 | $17.18 | $23.10 | $28.96 | **Weighted Average Shares Outstanding** | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :----- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Basic | 13,435,507 | 16,790,189 | 13,849,711 | 16,924,014 | | Diluted | 13,517,979 | 16,794,279 | 13,927,372 | 16,944,900 | [13. STOCK REPURCHASES](index=43&type=section&id=13.%20STOCK%20REPURCHASES) The company repurchased a significant number of common shares during Q2 and H1 2022, reducing outstanding shares under board authorizations **Stock Repurchases (in millions, except share data)** | Period | Number of Shares Repurchased (2022) | Cost (2022) | Number of Shares Repurchased (2021) | Cost (2021) | | :----- | :---------------------------------- | :---------- | :---------------------------------- | :---------- | | Three Months Ended June 30 | 403,953 | $229.7 | 598,163 | $254.5 | | Six Months Ended June 30 | 1,207,688 | $652.7 | 991,571 | $389.7 | - As of June 30, 2022, the company had authorization to repurchase an additional **419,607** shares of common stock under the September 28, 2021, board authorization[204](index=204&type=chunk) [14. STOCK-BASED COMPENSATION PLANS](index=44&type=section&id=14.%20STOCK-BASED%20COMPENSATION%20PLANS) Stock-based compensation expense significantly increased for both periods ended June 30, 2022, contrasting with a 2021 reversal due to a former CEO's retirement **Stock-Based Compensation Expense (in millions)** | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :----- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Stock options | $8.5 | — | $17.0 | — | | Restricted stock units | $0.6 | $(2.6) | $1.2 | $(1.9) | | Restricted stock | — | $(8.3) | — | $(7.9) | | **Total** | **$9.1** | **$(10.9)** | **$18.2** | **$(9.8)** | - The reversal of stock-based compensation expense for the three and six months ended June 30, 2021, was primarily due to an **$11.5 million** reversal upon the retirement of the former Chief Executive Officer in May 2021[208](index=208&type=chunk) - The increase in 2022 expense is partly due to the accounting grant date of **770,500** stock options (granted Dec 2020-June 2021) being July 21, 2021, after shareholder approval[207](index=207&type=chunk) **Total Projected Stock-Based Compensation Expense (in millions)** | Year | Amount | | :--- | :----- | | Remainder of 2022 | $18.2 | | 2023 | $35.7 | | 2024 | $34.9 | | 2025 | $4.7 | | 2026 | $0.5 | | **Total** | **$94.0** | [15. COMMITMENTS AND CONTINGENCIES](index=44&type=section&id=15.%20COMMITMENTS%20AND%20CONTINGENCIES) The company faces various consumer claims, litigation, and regulatory investigations, including a **$12.0 million** class action settlement and multiple state and federal inquiries - On December 1, 2021, the company received a subpoena from the California Attorney General seeking documents and information regarding GAP products, administration, and refunds. The eventual scope, duration, or outcome cannot be predicted[213](index=213&type=chunk) - On June 14, 2022, the company reached an agreement in principle to settle a putative class action lawsuit for an aggregate cash payment of **$12.0 million**, which was recognized as a contingent loss during Q2 2022[214](index=214&type=chunk) - The Office of the New York State Attorney General has an ongoing investigation (since May 2019) into the company's origination and collection policies and procedures and securitizations. The eventual scope, duration, or outcome cannot be predicted[215](index=215&type=chunk) - The Bureau of Consumer Financial Protection (BCFP) has an ongoing investigation (since April 2019) into the company's consumer loan origination practices, with a NORA letter received in December 2021 alleging CFPA violations. The eventual scope, duration, or outcome cannot be predicted[218](index=218&type=chunk) - The Attorney General of the State of Maryland is leading a multi-state inquiry (expanded August 2020 to **41** other states and D.C.) into the company's repossession, sale, origination, and collection policies. The eventual scope, duration, or outcome cannot be predicted[219](index=219&type=chunk) [ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=47&type=section&id=ITEM%202.%20MANAGEMENT%27S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) This section analyzes financial performance, critical success factors, consumer loan metrics, capital access, liquidity, and critical accounting estimates for the periods ended June 30, 2022 - Consolidated net income for the three and six months ended June 30, 2022, decreased significantly compared to 2021, primarily due to increases in provision for credit losses and operating expenses, and a decrease in finance charges[225](index=225&type=chunk)[226](index=226&type=chunk) - Critical success factors include accurately forecasting Consumer Loan performance, accessing capital on acceptable terms, and maintaining or growing Consumer Loan volume to maximize economic profit[227](index=227&type=chunk) - During Q1 2022, the company removed the COVID forecast adjustment and enhanced its forecasting methodology, which increased forecasted net cash flows by **$95.7 million** and reduced provision for credit losses by **$70.6 million**[233](index=233&type=chunk)[234](index=234&type=chunk) - Total balance sheet indebtedness increased to **$4,792.2 million** as of June 30, 2022, from **$4,616.3 million** as of December 31, 2021, primarily due to stock repurchases[293](index=293&type=chunk) [Overview](index=47&type=section&id=Overview) Credit Acceptance provides auto financing, with Q2 and H1 2022 net income significantly decreasing due to higher credit loss provisions and operating expenses - Credit Acceptance offers financing programs that enable automobile dealers to sell vehicles to consumers, regardless of their credit history[224](index=224&type=chunk) **Net Income and Diluted EPS (in millions, except per share data)** | Period | Net Income (2022) | Net Income (2021) | Diluted EPS (2022) | Diluted EPS (2021) | | :----- | :---------------- | :---------------- | :----------------- | :----------------- | | Three Months Ended June 30 | $107.4 | $288.6 | $7.94 | $17.18 | | Six Months Ended June 30 | $321.7 | $490.7 | $23.10 | $28.96 | - For the three months ended June 30, 2022, Consumer Loan assignment unit volume grew **5.1%** and dollar volume grew **22.0%** compared to the same period in 2021[225](index=225&type=chunk) [Critical Success Factors](index=47&type=section&id=Critical%20Success%20Factors) Key success factors include accurate Consumer Loan performance forecasting, acceptable capital access, and maintaining loan volume for long-term economic profit - Critical success factors include the ability to accurately forecast Consumer Loan performance, access capital on acceptable terms, and maintain or grow Consumer Loan volume at anticipated levels and terms[227](index=227&type=chunk) - The objective is to maximize economic profit over the long term, which is a non-GAAP financial measure used to evaluate financial results and business decisions[227](index=227&type=chunk) [Consumer Loan Metrics](index=48&type=section&id=Consumer%20Loan%20Metrics) Consumer Loan collection rates are forecasted using a statistical model, with Q2 2022 showing declines for recent assignments and a decreased collection-to-advance rate spread - A statistical model is used to estimate the expected collection rate for each Consumer Loan at the time of assignment, with continuous evaluation as loans age[230](index=230&type=chunk) - For the three months ended June 30, 2022, forecasted collection rates declined for Consumer Loans assigned in 2020 through 2022[230](index=230&type=chunk) - For the six months ended June 30, 2022, forecasted collection rates improved for Consumer Loans assigned in 2014, 2016, 2017, and 2019 through 2021, but declined for 2022 Consumer Loans[230](index=230&type=chunk) - The spread between the forecasted collection rate and the advance rate decreased from **21.6%** in 2021 to **19.2%** in 2022 for total loans, primarily due to 2021 loans exceeding initial estimates and 2022 loans performing lower than initial estimates, coupled with higher advance rates[240](index=240&type=chunk) - The risk of a material change in forecasted collection rates declines as Consumer Loans age; for 2017 and prior assignments, over **90%** of expected collections have been realized[240](index=240&type=chunk) [Access to Capital](index=52&type=section&id=Access%20to%20Capital) Capital strategy relies on consistent performance, modest leverage (funded debt to equity ratio of **3.2 to 1**), and diverse funding sources - The strategy for accessing capital involves maintaining consistent financial performance, modest financial leverage, and multiple funding sources[248](index=248&type=chunk) - The funded debt to equity ratio was **3.2 to 1** as of June 30, 2022[248](index=248&type=chunk) - Primary forms of debt financing include a revolving secured line of credit, Warehouse facilities, Term ABS financings, and senior notes[248](index=248&type=chunk) [Consumer Loan Volume](index=52&type=section&id=Consumer%20Loan%20Volume) Q2 2022 Consumer Loan unit volume grew **5.1%** and dollar volume grew **22.0%**, but H1 2022 unit volume declined due to low dealer inventories and high used vehicle prices **Consumer Loan Volume Changes (Year over Year)** | Period | Unit Volume % Change | Dollar Volume % Change | | :----- | :------------------- | :--------------------- | | 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% | - Unit and dollar volumes grew **5.1%** and **22.0%**, respectively, during Q2 2022, driven by a **1.9%** increase in active Dealers and a **2.4%** increase in average unit volume per active Dealer[251](index=251&type=chunk) - For the six months ended June 30, 2022, Consumer Loan unit volume decreased by **10.5%**, while dollar volume grew by **3.7%**[254](index=254&type=chunk) - Low dealer inventories and elevated used vehicle prices continue to have a negative impact on unit volumes[251](index=251&type=chunk) [Results of Operations](index=54&type=section&id=Results%20of%20Operations) This section details financial performance for Q2 and H1 2022, highlighting significant changes in revenue, expenses, net income, and the impact of credit loss provisions - The net Loan income recognized over the life of a Loan equals the cash collected from the underlying Consumer Loan less the cash paid to the Dealer[259](index=259&type=chunk) - The GAAP CECL methodology is believed to not provide sufficient transparency into the economics of the business due to its asymmetry in recognizing provision for credit losses at assignment and finance charge revenue in subsequent periods[259](index=259&type=chunk) [Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021](index=54&type=section&id=Three%20Months%20Ended%20June%2030%2C%202022%20Compared%20to%20Three%20Months%20Ended%20June%2030%2C%202021) Net income decreased by **62.8%** to **$107.4 million** due to a **$178.0 million** increase in credit loss provision and **$46.5 million** higher operating expenses **Financial Performance (Three Months Ended June 30, in millions)** | Metric | 2022 | 2021 | $ Change | % Change | | :----- | :--- | :--- | :------- | :------- | | Total Revenue | $457.4 | $471.7 | $(14.3) | -3.0% | | Operating Expenses | $116.7 | $70.2 | $46.5 | 66.2% | | Provision for Credit Losses | $147.5 | $(30.5) | $178.0 | -583.6% | | Net Income | $107.4 | $288.6 | $(181.2) | -62.8% | - The increase in operating expenses was primarily due to a **$27.0 million** increase in salaries and wages (driven by stock-based compensation and technology department growth) and a **$15.4 million** increase in general and administrative expenses (including a **$12.0 million** legal settlement contingent loss)[265](index=265&type=chunk) - The **$178.0 million** increase in provision for credit losses was primarily due to a decline in Consumer Loan performance during Q2 2022 compared to an improvement in Q2 2021[267](index=267&type=chunk)[268](index=268&type=chunk) - Other income increased by **$5.9 million** (**56.2%**), mainly due to an increase in ancillary product profit sharing[264](index=264&type=chunk) - Interest expense decreased by **$3.1 million** (**7.4%**) due to a decrease in the average cost of debt from **3.5%** in 2021 to **3.2%** in 2022[270](index=270&type=chunk)[271](index=271&type=chunk) [Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021](index=57&type=section&id=Six%20Months%20Ended%20June%2030%2C%202022%20Compared%20to%20Six%20Months%20Ended%20June%2030%2C%202021) Net income decreased by **34.4%** to **$321.7 million** due to a **$180.0 million** increase in credit loss provision and **$36.4 million** higher operating expenses **Financial Performance (Six Months Ended June 30, in millions)** | Metric | 2022 | 2021 | $ Change | % Change | | :----- | :--- | :--- | :------- | :------- | | Total Revenue | $913.1 | $922.7 | $(9.6) | -1.0% | | Operating Expenses | $219.2 | $182.8 | $36.4 | 19.9% | | Provision for Credit Losses | $170.8 | $(9.2) | $180.0 | -1,956.5% | | Net Income | $321.7 | $490.7 | $(169.0) | -34.4% | - The increase in operating expenses was primarily due to a **$42.1 million** increase in salaries and wages (driven by stock-based compensation and growth in support/servicing functions), partially offset by an **$11.8 million** decrease in general and administrative expense (due to a **$27.2 million** legal settlement in 2021, partially offset by a **$12.0 million** contingent loss in 2022)[277](index=277&type=chunk) - The **$180.0 million** increase in provision for credit losses was due to a smaller improvement in Consumer Loan performance and the impact of forecasting methodology changes (removal of COVID adjustment)[278](index=278&type=chunk)[279](index=279&type=chunk) - Other income increased by **$12.0 million** (**54.1%**)[274](index=274&type=chunk) - Interest expense decreased by **$10.4 million** (**12.1%**) due to a decrease in the average cost of debt from **3.6%** in 2021 to **3.2%** in 2022[282](index=282&type=chunk)[283](index=283&type=chunk) [Properties](index=59&type=section&id=Properties) The company's "remote first" strategy created excess office space, with owned buildings' market value potentially below carrying value, risking impairment charges - The company has adopted a "remote first" strategy, leading to excess space in its two owned office buildings in Southfield, Michigan, and leased office space in Henderson, Nevada (lease expires December 2022)[285](index=285&type=chunk)[286](index=286&type=chunk) - The market value of the owned buildings and related assets is believed to be significantly less than their combined carrying value of **$40.2 million**[286](index=286&type=chunk) - Reclassifying a building as held for sale would require recording an impairment charge to reduce its carrying value to estimated market value less costs to sell[286](index=286&type=chunk) [Liquidity and Capital Resources](index=60&type=section&id=Liquidity%20and%20Capital%20Resources) Liquidity is supported by operating cash flows and diverse debt financings, with total indebtedness at **$4,792.2 million** and substantial unused credit lines - Primary sources of capital are cash flows from operating activities, collections of Consumer Loans, and borrowings under a revolving secured line of credit, Warehouse facilities, Term ABS financings, and senior notes[289](index=289&type=chunk) - Total balance sheet indebtedness increased to **$4,792.2 million** as of June 30, 2022, from **$4,616.3 million** as of December 31, 2021, primarily due to stock repurchases[293](index=293&type=chunk) - As of June 30, 2022, the company had **$1,239.3 million** in unused and available lines of credit[293](index=293&type=chunk) **Scheduled Principal Debt Maturities (in millions) as of June 30, 2022** | Year | Amount | | :--- | :----- | | Remainder of 2022 | $1,034.6 | | 2023 | $1,626.6 | | 2024 | $1,243.8 | | 2025 | $508.2 | | 2026 | $403.1 | | Over five years | — | | **Total** | **$4,816.3** | - Management believes anticipated cash flows from operations and various financing alternatives will provide sufficient financing for debt maturities and future operations, but borrowing ability may be impacted by economic and financial market conditions[295](index=295&type=chunk) [Critical Accounting Estimates](index=61&type=section&id=Critical%20Accounting%20Estimates) Critical accounting estimates involve significant judgment in forecasting loan cash flows, with Q1 2022 methodology changes increasing net cash flows by **$95.7 million** and reducing credit loss provision by **$70.6 million** - The preparation of financial statements requires management to make estimates and judgments, particularly concerning the amount and timing of future net cash flows from the Loan portfolio[297](index=297&type=chunk) - During Q1 2022, the company removed the COVID forecast adjustment and enhanced its forecasting methodology[297](index=297&type=chunk) **Impact of Forecasting Methodology Changes (in millions)** | Change | Forecasted Net Cash Flows (Increase / (Decrease)) | Provision for Credit Losses (Increase / (Decrease)) | | :----- | :------------------------------------------------ | :-------------------------------------------------- | | Removal of COVID forecast adjustment | $149.5 | $(118) | | Implementation of enhanced forecasting methodology | $(53.8) | $47 | | **Total** | **$95.7** | **$(70)** | [Forward-Looking Statements](index=61&type=section&id=Forward-Looking%20Statements) Forward-looking statements are subject to various industry, operational, macroeconomic, and regulatory risks, with the company claiming safe harbor protection - The company makes forward-looking statements and claims the protection of the safe harbor for such statements contained in the Private Securities Litigation Reform Act of 1995[299](index=299&type=chunk)[300](index=300&type=chunk) - Forward-looking statements are subject to risks and uncertainties, including industry, operational, macroeconomic, capital and liquidity, information technology and cybersecurity, and legal and regulatory risks[300](index=300&type=chunk)[302](index=302&type=chunk)[303](index=303&type=chunk)[304](index=304&type=chunk)[305](index=305&type=chunk) - The company expressly disclaims any obligation to update or alter its statements whether as a result of new information, future events or otherwise, except as required by applicable law[307](index=307&type=chunk) [ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=63&type=section&id=ITEM%203.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) No material changes occurred in the market risk information previously disclosed in the 2021 Annual Report on Form 10-K - There have been no material changes to the market risk information included in the 2021 Annual Report on Form 10-K[308](index=308&type=chunk) [ITEM 4. CONTROLS AND PROCEDURES](index=63&type=section&id=ITEM%204.%20CONTROLS%20AND%20PROCEDURES) Disclosure controls and procedures were effective as of June 30, 2022, with no material changes to internal control over financial reporting during the quarter - Management, with the participation of the principal executive and principal financial officer, evaluated and concluded that disclosure controls and procedures were effective as of June 30, 2022[309](index=309&type=chunk) - There have not been any changes in internal control over financial reporting during the fiscal quarter that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting[310](index=310&type=chunk) [PART II. — OTHER INFORMATION](index=64&type=section&id=PART%20II.%20%E2%80%94%20OTHER%20INFORMATION) This part includes information on legal proceedings, risk factors, equity security sales, exhibits, and required signatures [ITEM 1. LEGAL PROCEEDINGS](index=64&type=section&id=ITEM%201.%20LEGAL%20PROCEEDINGS) The company is routinely involved in consumer claims, litigation, and regulatory investigations, with significant details referenced from Note 15 of the financial statements - The company is frequently subject to various consumer claims, litigation, and regulatory investigations seeking damages, fines, and statutory penalties[313](index=313&type=chunk) - An adverse ultimate disposition in any action could have a material adverse impact on the company's financial position, liquidity, and results of operations[313](index=313&type=chunk) - A description of significant litigation is incorporated by reference from Note 15 to the consolidated financial statements[314](index=314&type=chunk) [ITEM 1A. RISK FACTORS](index=64&type=section&id=ITEM%201A.%20RISK%20FACTORS) This section updates risk factors, highlighting potential material adverse effects of the Russia-Ukraine conflict on business, financial condition, and liquidity - The current conflict between Russia and Ukraine could have a material adverse effect on the company's business, financial condition, liquidity, and results of operations[315](index=315&type=chunk)[316](index=316&type=chunk) - The conflict may lead to diminished liquidity and credit availability, reduced consumer confidence, disruptions to energy and food supplies, decreased economic growth, higher unemployment rates, increased inflation, and political and social upheaval[316](index=316&type=chunk) - Expansion of the military conflict or retaliatory actions could broaden and intensify the negative impact on financial markets, economic conditions, and geopolitical stability[316](index=316&type=chunk) [ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS](index=65&type=section&id=ITEM%202.%20UNREGISTERED%20SALES%20OF%20EQUITY%20SECURITIES%20AND%20USE%20OF%20PROCEEDS) The company repurchased **403,953** common shares for **$229.7 million** in Q2 2022, with **419,607** shares remaining authorized for repurchase **Issuer Purchases of Equity Securities (Three Months Ended June 30, 2022)** | Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | :----- | :------------------------------- | :--------------------------- | :------------------------------------------------------------------------------- | | April 1 to April 30, 2022 | 224,204 | $557.52 | 224,204 | | May 1 to May 31, 2022 | 179,749 | $582.80 | 179,749 | | June 1 to June 30, 2022 | — | — | — | | **Total** | **403,953** | **$568.77** | **403,953** | - Repurchases were made under the September 28, 2021, board authorization for up to **two million** shares of common stock[319](index=319&type=chunk) - As of June 30, 2022, **419,607** shares remained authorized for repurchase under the September 2021 Authorization[319](index=319&type=chunk) [ITEM 6. EXHIBITS](index=66&type=section&id=ITEM%206.%20EXHIBITS) This section lists various exhibits filed with the 10-Q report, including legal agreements and certifications - The exhibits include various legal and financial documents such as indentures, sale and servicing agreements, trust agreements, intercreditor agreements, and amendments to credit agreements[321](index=321&type=chunk) - Certifications of the principal executive officer and principal financial officer pursuant to the Sarbanes-Oxley Act of 2002 are also included[321](index=321&type=chunk) [SIGNATURES](index=67&type=section&id=SIGNATURES) The report is signed by Jay D. Martin, Senior Vice President, Finance and Accounting (Chief Accounting Officer), on August 1, 2022 - The report was signed by Jay D. Martin, Senior Vice President, Finance and Accounting (Chief Accounting Officer) of Credit Acceptance Corporation[325](index=325&type=chunk) - The signature date is August 1, 2022[325](index=325&type=chunk)

Credit Acceptance Corporation (NASDAQ:CACC) Q1 2022 Earnings Conference Call May 2, 2022 5:00 PM ET Company Participants Doug Busk - Chief Treasury Officer Ken Booth - Chief Executive Officer Conference Call Participants Moshe Orenbuch - Credit Suisse Arjun Tuteja - Jarislowsky, Fraser Rob Wildhack - Autonomous Research Alexandra Villalobos - Jefferies Operator Good day, everyone and welcome to the Credit Acceptance Corporation’s First Quarter 2022 Earnings Call. Today’s call is being recorded. A webcast an ...