Credit Acceptance(CACC) - 2022 Q4 - Annual Report

PART I Business The company provides indirect auto financing to consumers with limited credit history through a nationwide dealer network Principal Business and Programs 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] 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 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] Geographic Concentration and Competition 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][348] 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 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] - 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][386] - 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][353][354] Human Capital 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][357] - 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][329] Risk Factors The company faces significant risks from its subprime lending model, competition, debt covenants, and regulatory scrutiny Industry, Operational and Macroeconomic Risks 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][392] - 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][393] - 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][400] Capital and Liquidity Risks 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][407] - Debt agreements contain restrictive covenants that limit the company's ability to incur more debt, pay dividends, make acquisitions, and sell assets[22][172][405] - Fluctuations in interest rates may adversely affect borrowing costs, as some debt facilities have variable rates[140][408][439] Technology and Cybersecurity Risks 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] - The company collects and stores sensitive consumer and employee data, making it a target for cyber attacks[30][60][141] - 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][411] Legal and Regulatory Risks 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][412] - 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][413] Properties 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][444] - A "remote first" strategy has resulted in significant excess office space, and the company is considering selling or leasing one or both buildings[33][174] - 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] Legal Proceedings 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][445] Mine Safety Disclosures This item is not applicable to the company's business - Not applicable[416] PART II Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities 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][417] 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] Management's Discussion and Analysis of Financial Condition and Results of Operations Net income decreased significantly in 2022 due to a higher provision for credit losses from declining loan performance 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] Consumer Loan Metrics 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) 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][466] - 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][114][146] - Operating expenses increased by $42.6 million (11.1%), mainly driven by a $43.9 million rise in salaries and wages[467] - Other income increased by $30.3 million (57.1%), primarily due to a $20.4 million increase in ancillary product profit sharing income[85] Critical Accounting Estimates 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][470] - 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][117][472] - 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] Liquidity and Capital Resources 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] - During 2022, the company completed new Term ABS financings totaling over $900 million and extended several other credit facilities[95][506][507] 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 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][480] - 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] - 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] - 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] Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements and accompanying notes for fiscal year 2022 Consolidated Financial Statements 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 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][213] - 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][578][605] - 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][636][638] - 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][727][757] Controls and Procedures 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] - There were no material changes in internal control over financial reporting during the fourth quarter of 2022[514] - 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][522]