Credit Acceptance Announces First Quarter 2017 Earnings

Credit Acceptance Corporation (Nasdaq: CACC) (referred to as the “Company”, “Credit Acceptance”, “we”, “our”, or “us”) today announced consolidated net income of $93.3 million, or $4.72 per diluted share, for the three months ended March 31, 2017 compared to consolidated net income of $74.4 million, or $3.63 per diluted share, for the same period in 2016.

Adjusted net income, a non-GAAP financial measure, for the three months ended March 31, 2017 was $92.3 million, or $4.67 per diluted share, compared to $82.3 million, or $4.02 per diluted share, for the same period in 2016.

Webcast Details

We will host a webcast on May 1, 2017 at 5:00 p.m. Eastern Time to answer questions related to our first quarter results.  The webcast can be accessed live by visiting the “Investor Relations” section of our website at creditacceptance.com or by dialing 877-303-2904.  Additionally, a replay and transcript of the webcast will be archived in the “Investor Relations” section of our website.

Consumer Loan Metrics

Dealers assign retail installment contracts (referred to as “Consumer Loans”) to Credit Acceptance. At the time a Consumer Loan is submitted to us for assignment, we forecast future expected cash flows from the Consumer Loan. Based on the amount and timing of these forecasts and expected expense levels, an advance or one-time purchase payment is made to the related dealer at a price designed to maximize economic profit, a non-GAAP financial measure that considers our return on capital, our cost of capital and the amount of capital invested.

We use a statistical model to estimate the expected collection rate for each Consumer Loan at the time of assignment. We continue to evaluate the expected collection rate of each Consumer Loan subsequent to assignment. Our evaluation becomes more accurate as the Consumer Loans age, as we use actual performance data in our forecast. By comparing our current expected collection rate for each Consumer Loan with the rate we projected at the time of assignment, we are able to assess the accuracy of our initial forecast. The following table compares our forecast of Consumer Loan collection rates as of March 31, 2017, with the forecasts as of December 31, 2016 and at the time of assignment, segmented by year of assignment:

    Forecasted Collection Percentage as of (1)   Current Forecast Variance From  Consumer Loan Assignment Year   March 31, 2017   December 31, 2016   Initial
Forecast   December 31, 2016   Initial
Forecast 2008   70.4 %   70.4 %   69.7 %   0.0 %   0.7 % 2009   79.4 %   79.4 %   71.9 %   0.0 %   7.5 % 2010   77.6 %   77.6 %   73.6 %   0.0 %   4.0 % 2011   74.7 %   74.7 %   72.5 %   0.0 %   2.2 % 2012   73.8 %   73.7 %   71.4 %   0.1 %   2.4 % 2013   73.4 %   73.4 %   72.0 %   0.0 %   1.4 % 2014   71.7 %   71.8 %   71.8 %   -0.1 %   -0.1 % 2015   65.8 %   66.1 %   67.7 %   -0.3 %   -1.9 % 2016   65.3 %   65.1 %   65.4 %   0.2 %   -0.1 % 2017   64.9 %   —     64.0 %   —     0.9 %

(1) Represents the total forecasted collections we expect to collect on the Consumer Loans as a percentage of the repayments that we were contractually owed on the Consumer Loans at the time of assignment.  Contractual repayments include both principal and interest. Forecasted collection rates are negatively impacted by canceled Consumer Loans as the contractual amount owed is not removed from the denominator for purposes of computing forecasted collection rates in the table.

Consumer Loans assigned in 2009 through 2013 have yielded forecasted collection results materially better than our initial estimates, while Consumer Loans assigned in 2015 have yielded forecasted collection results materially worse than our initial estimates. For Consumer Loans assigned in 2008, 2014, 2016 and 2017, actual results have been close to our initial estimates. For the three months ended March 31, 2017, forecasted collection rates improved for Consumer Loans assigned in 2016 and 2017, declined for Consumer Loans assigned in 2015 and were generally consistent with expectations at the start of the period for all other assignment years presented.

The dollar amount of changes in forecasted collections, net of changes in forecasted dealer holdback payments, is as follows:

(In millions)   For the Three Months Ended March 31, Increase (decrease) in forecasted net cash flows   2017   2016 Dealer loans   $ (3.4 )   $ (9.6 ) Purchased loans   11.5     2.9   Total loans   $ 8.1     $ (6.7 )

 

The following table presents information on the average Consumer Loan assignment for each of the last ten years:

    Average  Consumer Loan Assignment Year   Consumer Loan (1)   Advance (2)   Initial Loan Term (in months) 2008   $ 14,518     $ 6,479     42 2009   12,689   5,565   38 2010   14,480   6,473   41 2011   15,686   7,137   46 2012   15,468   7,165   47 2013   15,445   7,344   47 2014   15,692   7,492   47 2015   16,354   7,272   50 2016   18,218   7,976   53 2017   19,416   8,337   54

(1)   Represents the repayments that we were contractually owed on Consumer Loans at the time of assignment, which include both principal and interest.

(2)   Represents advances paid to dealers on Consumer Loans assigned under our portfolio program and one-time payments made to dealers to purchase Consumer Loans assigned under our purchase program.  Payments of dealer holdback and accelerated dealer holdback are not included.

Forecasting collection rates accurately at loan inception is difficult.  With this in mind, we establish advance rates that are intended to allow us to achieve acceptable levels of profitability, even if collection rates are less than we initially forecast.

The following table presents forecasted Consumer Loan collection rates, advance rates, the spread (the forecasted collection rate less the advance rate), and the percentage of the forecasted collections that had been realized as of March 31, 2017.  All amounts, unless otherwise noted, are presented as a percentage of the initial balance of the Consumer Loan (principal + interest).  The table includes both dealer loans and purchased loans.

    As of March 31, 2017  Consumer Loan Assignment Year   Forecasted
Collection %   Advance % (1)   Spread %   % of Forecast
Realized (2) 2008   70.4 %   44.6 %   25.8 %   99.6 % 2009   79.4 %   43.9 %   35.5 %   99.6 % 2010   77.6 %   44.7 %   32.9 %   99.2 % 2011   74.7 %   45.5 %   29.2 %   98.4 % 2012   73.8 %   46.3 %   27.5 %   97.2 % 2013   73.4 %   47.6 %   25.8 %   91.7 % 2014   71.7 %   47.7 %   24.0 %   79.5 % 2015   65.8 %   44.5 %   21.3 %   56.8 % 2016   65.3 %   43.8 %   21.5 %   25.2 % 2017   64.9 %   42.9 %   22.0 %   2.6 %

(1) Represents advances paid to dealers on Consumer Loans assigned under our portfolio program and one-time payments made to dealers to purchase Consumer Loans assigned under our purchase program as a percentage of the initial balance of the Consumer Loans.  Payments of dealer holdback and accelerated dealer holdback are not included.

(2) Presented as a percentage of total forecasted collections.

The risk of a material change in our forecasted collection rate declines as the Consumer Loans age.  For 2013 and prior Consumer Loan assignments, the risk of a material forecast variance is modest, as we have currently realized in excess of 90% of the expected collections.  Conversely, the forecasted collection rates for more recent Consumer Loan assignments are less certain as a significant portion of our forecast has not been realized.

The spread between the forecasted collection rate and the advance rate has ranged from 21.3% to 35.5% over the last 10 years. The spread was at the high end of this range in 2009 and 2010, when the competitive environment was unusually favorable, and much lower during other years (2014 through 2017) when competition was more intense. The decline in the advance rate from 2016 to 2017 reflects the lower initial forecast on Consumer Loan assignments received in 2017, partially offset by an increase in purchased loans as a percentage of total unit volume. The increase in the spread from 2016 to 2017 was the result of the performance of 2017 Consumer Loans, which exceeded our initial estimates, partially offset by a change in the mix of Consumer Loan assignments received during 2017, including an increase in purchased loans as a percentage of total unit volume.

The following table compares our forecast of Consumer Loan collection rates as of March 31, 2017 with the forecasts at the time of assignment, for dealer loans and purchased loans separately:

    Dealer Loans   Purchased Loans     Forecasted Collection Percentageas of       Forecasted Collection Percentageas of      Consumer Loan Assignment Year   March 31,
 2017   Initial
Forecast   Variance   March 31,
 2017   Initial
Forecast   Variance 2008   70.8 %   70.2 %   0.6 %   69.8 %   68.8 %   1.0 % 2009   79.4 %   72.1 %   7.3 %   79.6 %   70.5 %   9.1 % 2010   77.7 %   73.6 %   4.1 %   77.5 %   73.1 %   4.4 % 2011   74.7 %   72.4 %   2.3 %   75.2 %   72.7 %   2.5 % 2012   73.8 %   71.3 %   2.5 %   73.9 %   71.4 %   2.5 % 2013   73.5 %   72.1 %   1.4 %   73.1 %   71.6 %   1.5 % 2014   71.6 %   71.9 %   -0.3 %   72.6 %   70.9 %   1.7 % 2015   65.0 %   67.5 %   -2.5 %   70.0 %   68.5 %   1.5 % 2016   64.3 %   65.1 %   -0.8 %   68.1 %   66.5 %   1.6 % 2017   64.5 %   63.7 %   0.8 %   65.9 %   64.5 %   1.4 %

The following table presents forecasted Consumer Loan collection rates, advance rates, and the spread (the forecasted collection rate less the advance rate) as of March 31, 2017 for dealer loans and purchased loans separately.  All amounts are presented as a percentage of the initial balance of the Consumer Loan (principal + interest).

    Dealer Loans   Purchased Loans  Consumer Loan Assignment Year   Forecasted Collection % (1)   Advance %(1)(2)   Spread %   Forecasted Collection % (1)   Advance %(1)(2)   Spread % 2008   70.8 %   43.3 %   27.5 %   69.8 %   46.7 %   23.1 % 2009   79.4 %   43.4 %   36.0 %   79.6 %   45.3 %   34.3 % 2010   77.7 %   44.4 %   33.3 %   77.5 %   46.2 %   31.3 % 2011   74.7 %   45.2 %   29.5 %   75.2 %   47.4 %   27.8 % 2012   73.8 %   46.1 %   27.7 %   73.9 %   47.6 %   26.3 % 2013   73.5 %   47.1 %   26.4 %   73.1 %   49.8 %   23.3 % 2014   71.6 %   47.2 %   24.4 %   72.6 %   51.3 %   21.3 % 2015   65.0 %   43.4 %   21.6 %   70.0 %   50.1 %   19.9 % 2016   64.3 %   42.1 %   22.2 %   68.1 %   48.5 %   19.6 % 2017   64.5 %   41.6 %   22.9 %   65.9 %   46.2 %   19.7 %

(1) The forecasted collection rates and advance rates presented for each Consumer Loan assignment year change over time due to the impact of transfers between dealer and purchased loans.  Under our portfolio program, certain events may result in dealers forfeiting their rights to dealer holdback.  We transfer the dealer’s Consumer Loans from the dealer loan portfolio to the purchased loan portfolio in the period this forfeiture occurs.

(2) Represents advances paid to dealers on Consumer Loans assigned under our portfolio program and one-time payments made to dealers to purchase Consumer Loans assigned under our purchase program as a percentage of the initial balance of the Consumer Loans.  Payments of dealer holdback and accelerated dealer holdback are not included.

Although the advance rate on purchased loans is higher as compared to the advance rate on dealer loans, purchased loans do not require us to pay dealer holdback.

The spread on dealer loans increased from 22.2% in 2016 to 22.9% in 2017 as a result of the performance of 2017 Consumer Loans in our dealer loan portfolio, which exceeded our initial estimates, while those assigned to us in 2016 declined from our initial estimates, partially offset by a change in the mix of Consumer Loan assignments.

Consumer Loan Volume

The following table summarizes changes in Consumer Loan assignment volume in each of the last five quarters as compared to the same period in the previous year:

    Year over Year Percent Change Three Months Ended   Unit Volume   Dollar Volume (1) March 31, 2016   21.1 %   18.8 % June 30, 2016   15.1 %   27.6 % September 30, 2016   12.0 %   33.4 % December 31, 2016   -5.6 %   7.8 % March 31, 2017   -6.6 %   6.4 %

(1) Represents advances paid to dealers on Consumer Loans assigned under our portfolio program and one-time payments made to dealers to purchase Consumer Loans assigned under our purchase program.  Payments of dealer holdback and accelerated dealer holdback are not included.