Credit Acceptance Corp. posted year-over-year income increases even as company leadership acknowledged the difficulty in keeping originations coming through its dealer network as well as intensifying regulatory demands.
This past Friday, a few days after sharing its fourth-quarter and full-year financial results, Credit Acceptance said it received a civil investigative demand from the Federal Trade Commission on Nov. 7. Credit Acceptance said in a filing with the Securities and Exchange Commission that the FTC is seeking information on the company’s polices, practices and procedures in allowing dealers to use GPS starter interrupters on vehicles.
“We are cooperating with the inquiry and cannot predict the eventual scope, duration or outcome at this time,” the company said in the filing. “As a result, we are unable to estimate the reasonably possible loss or range of reasonably possible loss arising from this investigation.”
When the company released its fourth-quarter and full-year results, an investment analyst spotted an increase in its general and administrative expense of $2.7 million, or 27.6 percent. Credit Acceptance said it was primarily as a result of an increase in legal fees.
The analyst pressed and asked, “What was the increased legal fees that you guys noted in the press release?”
According to a transcript of the quarterly conference call posted by Credit Acceptance, senior vice president and treasurer Doug Busk replied, “Nothing specific there. We just have a bunch of issues ongoing that are consuming increased amounts of legal resources.”
Nevertheless, Credit Acceptance reported that its Q4 consolidated net income came in at $87.6 million, or $4.33 per diluted share, up from $80.0 million, or $3.84 per diluted share, during the same period a year earlier.
In all of 2016, the company generated $332.8 million, or $16.31 per diluted share, in consolidated net income, marking a rise from the 2015 figures that were $299.7 million, or $14.28 per diluted share.
Credit Acceptance also mentioned its adjusted net income, a non-GAAP financial measure, for Q4 climbed to $96.7 million, or $4.79 per diluted share. A year earlier, it was $83.3 million, or $4.00 per diluted share.
For the year, the company’s adjusted net income totaled $360.6 million, or $17.67 per diluted share; a rise from $309.8 million, or $14.77 per diluted share, compiled during 2015.
Originations and dealer relationships
Credit Acceptance finished 2016 with originations softening a bit during the fourth quarter. But for the full year, the company’s origination figure jumped by 10.9 percent.
The company secured 74,340 contracts in Q4; a figure 5.6 percent lower than the 70,179 originations posted during the year-earlier quarter. For all of 2016, Credit Acceptance took in 330,710 contracts, up from 298,288 booked in 2015.
The quarterly drop-off in originations prompted the opening question during Credit Acceptance’s conference call. Perhaps a reason why is the company posted double-digit gains year-over-year in quarterly originations for seven consecutive periods, including a high of 41.3 percent in Q3 of 2015.
“I think the first factor I would look at is the competitive environment,” Credit Acceptance chief executive officer Brett Roberts said. “That certainly makes things challenging. We're not getting any improvement there, but I don’t think it got any worse either.
“So I think what you saw in the fourth quarter is — as we talked about in prior calls — our strategy when the environment is competitive is to focus on growing the number of active dealers,” Roberts continued. “It is difficult to grow volume per dealer when it is very competitive. But as I think we alluded to several quarters ago, as the base of dealers gets bigger, it becomes more difficult to grow that at a fast enough rate in order to offset the decline in volume per dealer, and to a lesser extent, attrition. So that is what we're seeing right now.”
Roberts also mentioned another factor that might have impacted how much paper Credit Acceptance brought into its portfolio during Q4.
“I think in the fourth quarter, the other thing that came into play is, we addressed some of the negative variances that we have seen in recent originations. When we do that, it causes our initial collection forecast to decline, which means we advance the dealers less money. So that has a one-time impact on volume per dealer, and also on attrition,” Roberts said.
Credit Acceptance closed Q4 with 7,260 active dealers. The company considers a dealer to be active when a dealership has received funding for at least one contract during the period. The investment community wondered if Credit Acceptance might hit a ceiling for its active dealer network at perhaps 7,500.
“I think it’s too early to call it a ceiling. It's definitely a point of resistance. If the competitive environment, obviously, if that changes, that will change everything. But if we assume that the current state continues for the foreseeable future, I would look at it, at this point, as a point of resistance, and not a ceiling,” Roberts said.
More details of incoming contracts
The average contract amount and term Credit Acceptance added into its portfolio in Q4 hit new highs. The company reported the average amount financed was $18,218 and average term was 53 months.
For perspective, Credit Acceptance pointed out that back in 2007, those metrics were $13,878 and 41 months.
“We write terms all across the spectrum, from six months to 72 months, so the average term is a function of the mix. We do not have any current plans to increase the maximum term beyond 72. So the average will just be a function of our pricing strategies and where we see the most opportunity,” Roberts said.
“As we’ve talked about in prior calls, over a period of time when I first started, we would only write a 24-month loan. And we accumulated data and extended it out to 30, and accumulated more data, and we walked our way out to 72 months over a period of about 25 years. So we have been careful about it. And we’re comfortable with the terms that we offer now,” he continued.
Three parts of internal changes
As Roberts referenced, Credit Acceptance indicated that the company enhanced its methodology for forecasting the amount and timing of future collections on contracts through the utilization of more recent data and new forecast variables. The company spelled out three components involved in the implementation of the enhanced forecasting methodology that went into effect as of Oct 31, including:
• Decreased the forecasted collection rates for contract assigned in 2015 and 2016 and increased the forecasted collection rates for contracts assigned in 2011 through 2013
• Reduced forecasted net cash flows by $1.8 million, all of which related to indirect dealer contracts
• Did not have a material impact on provision for credit losses or net income
“We periodically refresh the model. So it is based on all the information we collect, both at loan origination, and as the loan moves through the servicing process,” Roberts said. “So it is really just mostly an update of the data, a refresh there. And also we redo the actual scorecard and re-weight the variables based on what seems to be most predictive.
“So it is something we do periodically, it’s more of a routine update. And really, the numbers were not all that different from what we had before,” he added.
Don Foss mentioned
Credit Acceptance announced back on Jan. 4 that founder Donald Foss, who most recently served as the company’s chairman, decided to retire as an officer and director. At that time, the company indicated the board had no intention to fill the chairman’s role or to fill the vacancy on the board created by Foss’ retirement. Credit Acceptance added the board of directors will be led by lead director and chair of the audit committee, Thomas Tryforos.
When the topic was broached during the Credit Acceptance conference call, Roberts reiterated the same company intentions.
“No, there are no plans at this point to have a chairman. We have a lead director. But we don’t need a chairman, and we have no plans to replace him,” Roberts said.