Credit Acceptance Reveals 2Q Earnings, Loan Performance
SOUTHFIELD, Mich. — Although its second-quarter net income slipped year-over-year, Credit Acceptance Corp., watched that financial reading climb when looking at its performance through the first six months of 2011.
Credit Acceptance reported Monday that its second-quarter consolidated net income came in at $44.8 million or $1.72 per diluted share during the time period that ended June 30. During the same span a year ago, the company generated $49.0 million or $1.55 per diluted share in consolidated net income.
Meanwhile, when looking at the same data point for the first half of this year, Credit Acceptance is on a positive year-over-year pace.
Through the first two quarters of 2011, Credit Acceptance's consolidated net income was $88.0 million or $3.29 per diluted share. During the first half of last year, the company's figure was $81.1 million or $2.56 per diluted share.
When looking at adjusted net income, a non-GAAP financial measure, Credit Acceptance's year-over-year comparisons are both in positive territory.
During the second quarter, Credit Acceptance's adjusted net income was $47.4 million or $1.81 per diluted share, compared to $41.7 million or $1.32 per diluted share for the same period in 2010.
The company pointed to several reasons why adjusted net income jumped:
—An increase in adjusted average capital of 26 percent primarily due to growth in the company's loan portfolio primarily as a result of an increase in active dealer-partners and the advance rate increases the company made during the first and fourth quarters of 2010 and the second quarter of 2011.
—A decrease in Credit Acceptance's cost of capital of 120 basis points due to a decline in the average cost of debt resulting from a decrease in available and unused credit capacity, a change in the mix of outstanding debt and more favorable pricing on revolving credit facilities.
—A decrease in the company's adjusted return on capital of 160 basis points primarily as a result of the following.
In conjunction with that adjusted return on capital, Credit Acceptance delved into the causes why:
—Finance charges decreased as a percentage of adjusted average capital primarily as a result of a decrease in the yield on the company's loan portfolio due to higher advance rates on consumer loans assigned in 2010 and 2011. The decrease in finance charges negatively impacted the adjusted return on capital by 150 basis points.
—Other income decreased as a percentage of adjusted average capital primarily as a result of $2.8 million (after-tax) of income recognized during the second quarter of 2010 related to discontinued arrangements with a third party vehicle service contract provider and a vendor that processes payments.
—Operating expenses decreased as a percentage of adjusted average capital primarily as a result of decreased support expenses, including lower expenses related to information technology, finance and project management activities. The decrease in operating expenses positively impacted the adjusted return on capital by 70 basis points.
For the six-month span that ended June 30, the company's adjusted net income settled at $93.6 million or $3.49 per diluted share, compared to adjusted net income of $77.2 million or $2.44 per diluted share during the same period in 2010.
Again, Credit Acceptance shared reasons why its adjusted net income through the first half of this year moved higher. Those factors included:
—An increase in adjusted average capital of 22.7 percent primarily due to growth in the company's loan portfolio primarily as a result of an increase in active dealer-partners and the advance rate increases made during the first and fourth quarters of 2010 and the second quarter of 2011.
—A decrease in the company's cost of capital of 100 basis points due to a decline in the average cost of debt resulting from a decrease in available and unused credit capacity, a change in the mix of outstanding debt and more favorable pricing on our revolving credit facilities.
Officials also pointed out a decrease in their adjusted return on capital of 40 basis points came primarily as a result of the following:
—Finance charges decreased as a percentage of adjusted average capital primarily as a result of a decrease in the yield on Credit Acceptance's loan portfolio due to higher advance rates on consumer loans assigned in 2010 and 2011. The decrease in finance charges negatively impacted the adjusted return on capital by 80 basis points.
—Other income decreased as a percentage of adjusted average capital primarily as a result of $3.4 million (after tax) of income recognized during 2010 related to discontinued arrangements with a third party vehicle service contract provider and a vendor that processes payments.
—Operating expenses decreased as a percentage of adjusted average capital primarily as a result of decreased support expenses, including lower expenses related to information technology and finance activities. The decrease in operating expenses positively impacted the adjusted return on capital by 80 basis points.
Consumer Loan Performance
Credit Acceptance placed its collection percentage at 73.6 percent at the end of the second quarter, slightly higher than the initial forecast of 73.1 percent but lower than the level a year ago, which was 76.0 percent.
Company officials explained how they arrived at that figure.
"At the time a consumer loan is submitted to us for assignment, we forecast future expected cash flows from the consumer loan," Credit Acceptance officials shared. "Based on these forecasts, an advance or one-time purchase payment is made to the related dealer-partner at a price designed to achieve an acceptable return on capital. If consumer loan performance equals or exceeds our original expectation, it is likely our target return on capital will be achieved.
"We use a statistical model to estimate the expected collection rate for each consumer loan at the time of assignment," they went on to state. "We continue to evaluate the expected collection rate of each consumer loan subsequent to assignment. Our evaluation becomes more accurate as the consumer loans age, as we use actual performance data in our forecast. By comparing our current expected collection rate for each consumer loan with the rate we projected at the time of assignment, we are able to assess the accuracy of our initial forecast."
With that explanation in mind, Credit Acceptance pointed out consumer loans assigned in 2002, 2003, 2009 and 2010 have yielded forecasted collection results materially better than initial estimates. However, consumer loans assigned in 2006 and 2007 have yielded forecasted collection results materially worse than initial estimates.
For 2004, 2005, and 2008, the company said actual results have been very close to initial estimates.
"For the three and six months ended June 30, forecasted collection rates increased for consumer loans assigned during 2009, 2010, and 2011 and were generally consistent with expectations at the start of the period for the other assignment years," Credit Acceptance detailed.
"Forecasting collection rates precisely at loan inception is difficult," officials added. "With this in mind, we establish advance rates that are intended to allow us to achieve acceptable levels of profitability, even if collection rates are less than we currently forecast."
Credit Acceptance reiterated the risk of a material change in forecasted collection rate declines as the consumer loans age.
"For 2007 and prior consumer loan assignments, the risk of a material forecast variance is modest, as we have currently realized in excess of 90 percent of the expected collections," company officials highlighted.
"Conversely, the forecasted collection rates for more recent consumer loan assignments are less certain as a significant portion of our forecast has not been realized," they acknowledged.
Credit Acceptance mentioned the spread between the forecasted collection rate and the advance rate declined during the 2004 through 2007 period as the company increased advance rates during this period in response to a more difficult competitive environment.
During 2008 and 2009, the company said the spread increased as the competitive environment improved, and Credit Acceptance reduced advance rates.
"In addition, during 2009, the spread was positively impacted by better than expected consumer loan performance," company officials pointed out.
"During 2010 and 2011, the spread decreased as we increased advance rates during this period in an attempt to maximize the amount of economic profit we generate in response to an increase in the amount of capital available to fund new loans," they concluded.