Credit Acceptance Corp. Examines 4Q Progress, Challenges
SOUTHFIELD, Mich. — Despite the negative impact from a reduction in forecasted collection rates, Credit Acceptance Corp. posted improvements in both fourth-quarter and annual income.
More specifically, consolidated net income for the fourth quarter was $18.6 million, compared with $12.5 million in the same period of 2007.
Full-year 2008 consolidated net income was $67.2 million, up from $54.9 million the previous year.
Adjusted quarterly net income was $23.6 million, versus $14.9 million in the fourth quarter of 2007. Meanwhile, annual adjusted income was $82.8 million, up from $61.7 million.
Breaking the quarterly results down further, consumer loan unit volume was down 13.4 percent compared to 2007 and consumer loan dollar volume was off 21 percent.
However, the number of dealer partners climbed 4 percent and the average net loans receivable balance was up 32 percent.
For the year, consumer loan unit volume jumped 13.7 percent and loan dollar volume improved 18.9 percent. Active dealer partners increased 15.5 percent and the average net loans were up 33.8 percent.
According to officials, both GAAP net income and adjusted net income for the fourth quarter and full year were negatively impacted by a reduction in projected collection rates during the second and fourth quarters of 2008.
"In addition, during the fourth quarter of 2008, we revised the estimated timing of future collections to reflect recent trends in prepayment frequency," officials explained.
"In recent periods we have experienced a reduction in prepayments, which typically result from payoffs that occur when customers reestablish a positive credit history, trade in their vehicle and finance another vehicle purchase with a more traditional auto loan," they added.
The company went on to explain that as financing availability has dwindled in light of troublesome economic conditions, prepayment rates have declined.
"The reduction in assumed future prepayment rates also adversely impacted fourth quarter results as assuming lower prepayment rates reduces the net present value of the cash flows expected from our loan portfolio," executives pointed out.
Basically, the company estimates future loan cash flows by comparing current portfolios to historical loans that have the same attributes, which include variables captured at loan origination (such as credit bureau data, application data, loan data, vehicle data) as well as attributes collected after origination, such as delinquency data.
"Prior to the second quarter of 2008, our forecasted cash flows were based on an assumption that loans within our current portfolio would produce similar collection rates as produced by historical loans with the same attributes," officials explained.
"During the second quarter of 2008, we modified our forecast to assume that loans originated in 2006, 2007, and 2008 would perform 100 to 300 basis points worse than historical loans with the same attributes," they continued.
Furthermore, during the fourth quarter, collection rates were, again, lower than expected and so the company adjusted its forecasting methodology.
This reduced projected future net cash flows by $9.5 million.
"Under GAAP accounting, a portion of the cash impact was recorded as a current period expense through a provision for credit losses and a portion was recorded as a reduction in our loan yield, which impacts the amount of revenue recorded in both current and future periods," the company stated.
"GAAP results for the fourth quarter include a $10.6 million provision for credit losses and a reduction in loan revenue of $0.8 million as a result of the forecast revision, which reduced net income by $7.2 million," officials continued.
"Since the combined impact recorded in the fourth quarter exceeds the cash impact, the excess will be recorded as an increase in loan revenue in future periods," they noted. "The current period impact of the forecast revision exceeds the cash impact under GAAP since GAAP results also reflect the change in the estimated timing of future collections as a result of reduced prepayment expectations."