Auto Loans Receivable

12 Months Ended

Dec. 31, 2022

AUTO LOANS RECEIVABLE

Auto loans receivable include amounts due from customers related to retail vehicle sales financed through our recently acquired auto finance company (referred to as AutoNation Finance), as well as retail vehicle installment sales contracts acquired through third-party independent dealers. Auto loans receivable are presented net of an allowance for expected credit losses. Auto loans receivable represent a large group of smaller-balance homogeneous loans, which we consider to be part of one class of financing receivable and one portfolio segment for purposes of determining our allowance for expected credit losses.

Interest income and expenses related to auto loans represent AutoNation Finance income (loss), which is included as a component of Other Income (Expense), Net (within Operating Income). Interest income on auto loans receivable is recognized when earned based on contractual loan terms. Direct costs associated with loan originations are capitalized and amortized using the effective interest method.

Auto Loans Receivable, Net

The components of auto loans receivable, net of unearned discounts and allowances for expected credit losses, at December 31, 2022 are as follows:


	2022




Total auto loans receivable	$	377.0
Accrued interest and fees	4.4
Deferred loan origination costs	0.5
Less: unearned discounts	(21.3)
Less: allowances for expected credit losses	(57.5)
Auto loans receivable, net	$	303.1

Credit Quality

We utilize proprietary credit scoring models to rate the risk of default for customers that apply for financing by evaluating customer credit history and certain credit application information. Our evaluation considers information such as payment history for prior or existing credit accounts, as well as application information such as income, collateral, and down payment. The scoring models yield credit program tiers that represent the relative likelihood of repayment. Customers with the highest probability of repayment are “Platinum” customers. Customers assigned a lower credit tier are determined to have a lower probability of repayment. For loans that are approved, the assigned credit tier influences the terms of the agreement, such as the required loan-to-value ratio and interest rate. After origination, credit tier assignments by customer are generally not updated.

We monitor the credit quality of the auto loans receivable on an ongoing basis and also validate the accuracy of the credit scoring models periodically. Loan performance is reviewed on a recurring basis to identify whether the assigned credit tier adequately reflect the customers’ likelihood of repayment, and if needed, adjustments are made to the scoring models on a prospective basis.

Auto Loans Receivable by Major Credit Program

The following table presents auto loans receivable, as of December 31, 2022, disaggregated by major credit program tier:


	Fiscal Year of Origination (1)
	2022		2021		2020		2019		2018		Prior to 2018		Total
Credit Program Tier:
Platinum	$	21.9	$	12.9	$	6.4	$	7.4	$	2.2	$	0.2	$	51.0
Gold	53.7		30.0		12.9		10.6		3.2		0.4		110.8
Silver	61.9		29.8		10.4		8.0		1.9		0.1		112.1
Bronze	41.4		17.1		7.4		3.7		1.0		0.1		70.7
Copper	19.2		8.0		2.6		1.8		0.7		0.1		32.4
Total auto loans receivable	$	198.1	$	97.8	$	39.7	$	31.5	$	9.0	$	0.9	$	377.0

Current-period gross write-offs	$	5.3	$	5.9	$	1.4	$	1.1	$	0.2	$	—	$	13.9

(1) Classified based on credit grade assigned when customer was initially approved for financing.

Allowance for Credit Losses

The allowance for credit losses represents the net credit losses expected over the remaining contractual life of our auto loans receivable. The allowance for credit losses is determined using a vintage-level statistical model that captures the relationship between historical changes in gross losses and the lifetime loss curves by month on book, credit tiers at origination, and seasonality, adjusted for expected recoveries based on historical recovery trends. The credit loss model also incorporates reasonable and supportable forecasts about the future utilizing a forecast of a macroeconomic variable, specifically, the change in U.S. disposable personal income, which we believe is most strongly correlated to evaluating and predicting expected credit losses of our auto loans receivable. We utilize a reasonable and supportable forecast period of one year, after which we immediately revert to historical experience.

We periodically consider whether the use of alternative variables would result in improved credit loss model accuracy and revise the model when appropriate. We also consider whether qualitative adjustments are necessary for factors that are not reflected in the quantitative methods but impact the measurement of estimated credit losses. Such adjustments include the expectations of the impact of recent economic trends on customer behavior.

The net loss estimate is calculated by applying the loss rates developed using the methods described above to the amortized cost basis of the auto loans receivable. The change in the allowance for credit losses is recognized through an adjustment to the provision for credit losses.

Rollforward of Allowance for Credit Losses

The following is a rollforward of our allowance for expected credit losses for auto loans receivable for the year ended December 31, 2022:


	2022
Balance as of beginning of year	$	—
Provision for credit losses(1)	43.8
Initial allowance for purchased credit-deteriorated loans	21.7
Write-offs	(13.9)
Recoveries(2)	5.9
Balance as of end of year	$	57.5

(1) Includes initial credit loss expense of $34.2 million associated with the auto loan portfolio acquired in the acquisition of CIG Financial on October 1, 2022.
(2) Net of costs incurred to recover vehicle collateral.

Purchased Financial Assets with Credit Deterioration

Upon the acquisition of CIG Financial on October 1, 2022, we purchased certain auto loans receivable for which there was evidence of more than insignificant deterioration of credit quality since origination (purchased credit-deteriorated or “PCD” assets). The following is a reconciliation of the difference between the purchase price of the financial assets and the par value of the assets on the acquisition date:


Purchase price of PCD loans at acquisition	$	103.2
Initial allowance for credit losses of PCD loans at acquisition	21.7
Noncredit premium of PCD loans at acquisition	(3.0)
Par value of acquired PCD loans at acquisition	$	121.9

Past Due Auto Loans Receivable

An account is considered delinquent if 95% of the required principal and interest payments have not been received as of the date such payments were due. All loans continue to accrue interest until repayment, write-off, or when a loan reaches 75 days past due. If payment is received after a loan has stopped accruing interest due to reaching 75 days past due, the loan will be deemed current and the accrual of interest resumes. When a write-off occurs, accrued interest is written off by reversing interest income. Payments received on nonaccrual assets are recorded using a combination of the cost recovery method and the cash basis method depending on whether the related loan has been written off. In general, accounts are written off on the last business day of the month during which the earliest of the following occurs: the receivable is 120 days or more delinquent as of the last business day of the month, the vehicle has been repossessed and liquidated, or the related vehicle has been in repossession inventory for at least 60 days. The following table presents past due auto loans receivable, as of December 31, 2022:


	Age Analysis of Past-Due Financial Assets as of December 31, 2022
	31-60 Days		61-90 Days		Greater than 90 Days		Total Past Due		Current		Total
Auto loans receivable	$	13.0	$	4.1	$	2.6	$	19.7	$	357.3	$	377.0