SOUTHFIELD, Mich., Aug. 3, 2010 (GLOBE NEWSWIRE) -- Credit Acceptance Corporation (Nasdaq:CACC) (referred to as the "Company", "we", "our", or "us") announced consolidated net income of $49.0 million, or $1.55 per diluted share, for the three months ended June 30, 2010 compared to consolidated net income of $36.2 million, or $1.15 per diluted share, for the same period in 2009. For the six months ended June 30, 2010, consolidated net income was $81.1 million, or $2.56 per diluted share, compared to consolidated net income of $65.2 million, or $2.08 per diluted share, for the same period in 2009.

Adjusted net income, a non-GAAP financial measure, for the three months ended June 30, 2010 was $41.7 million, or $1.32 per diluted share, compared to $30.1 million, or $0.96 per diluted share, for the same period in 2009. For the six months ended June 30, 2010, adjusted net income was $77.2 million, or $2.44 per diluted share, compared to adjusted net income of $54.8 million, or $1.75 per diluted share, for the same period in 2009.

Refer to our Form 10-Q, filed today with the Securities and Exchange Commission, which will appear on our website at creditacceptance.com, for a complete discussion of the results of operations and financial data for the three and six months ended June 30, 2010.

Webcast Details

We will host a webcast on August 3, 2010 at 5:00 p.m. Eastern Time to discuss second quarter 2010 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 Performance

At the time the consumer loan is submitted to us for assignment, we forecast future expected cash flows from the consumer loan. Based on these forecasts, an advance or one-time 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. 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 June 30, 2010, with the forecasts as of March 31, 2010, as of December 31, 2009, and at the time of assignment, segmented by year of assignment:

  Forecasted Collection Percentage as of Variance in Forecasted Collection Percentage from
Consumer Loan Assignment Year June 30, 2010 March 31, 2010 December 31, 2009 Initial Forecast March 31, 2010 December 31, 2009 Initial Forecast
2001 67.5% 67.5% 67.5% 70.4% 0.0% 0.0% -2.9%
2002 70.5% 70.5% 70.4% 67.9% 0.0% 0.1% 2.6%
2003 73.7% 73.7% 73.7% 72.0% 0.0% 0.0% 1.7%
2004 73.1% 73.1% 73.1% 73.0% 0.0% 0.0% 0.1%
2005 73.8% 73.8% 73.7% 74.0% 0.0% 0.1% -0.2%
2006 70.2% 70.3% 70.3% 71.4% -0.1% -0.1% -1.2%
2007 68.0% 68.1% 68.3% 70.7% -0.1% -0.3% -2.7%
2008 69.8% 69.8% 70.0% 69.7% 0.0% -0.2% 0.1%
2009 77.2% 76.4% 75.6% 71.9% 0.8% 1.6% 5.3%
2010 (1) 75.3% 73.4%  --  73.6% 1.9%  --  1.7%
               
(1) The forecasted collection rate for 2010 consumer loans as of June 30, 2010 includes both consumer loans that were in our portfolio as of March 31, 2010 and consumer loans assigned during the most recent quarter. The following table provides forecasted collection rates for each of these segments: 
  Forecasted Collection Percentage as of  
2010 Consumer Loan Assignment Period June 30, 2010 March 31, 2010 Variance
January 1, 2010 through March 31, 2010 76.9% 73.4% 3.5%
April 1, 2010 through June 30, 2010 73.6% -- --

Consumer loans assigned in 2002 through 2004 and 2008 through 2010 have performed better than our initial expectations while consumer loans assigned in 2001 and 2005 through 2007 have performed worse. During the second quarter of 2010, forecasted collection rates increased for consumer loans assigned during 2009 and 2010 and were consistent with expectations at the start of the period for other assignment years. During the first six months of 2010, forecasted collection rates increased for consumer loans assigned in 2009 and 2010, and decreased modestly for 2007 and 2008 consumer loan assignments.

As a result of current economic conditions and uncertainty about future conditions, our forecasts of future collection rates are subject to a greater than normal degree of risk. Our pricing strategy considers this in that we have established advance rates that are intended to allow us to achieve acceptable levels of profitability, even if collection rates are less than we currently forecast. 

The following table presents forecasted consumer loan collection rates, advance rates (includes amounts paid to acquire purchased loans), the spread (the forecasted collection rate less the advance rate), and the percentage of the forecasted collections that had been realized as of June 30, 2010. Payments of dealer holdback and accelerated dealer holdback are not included in the advance percentage paid to the dealer-partner. 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 June 30, 2010
Consumer Loan Assignment Year Forecasted Collection % Advance % Spread % % of Forecast Realized (1)
2001 67.5% 46.0% 21.5% 99.3%
2002 70.5% 42.2% 28.3% 99.2%
2003 73.7% 43.4% 30.3% 99.0%
2004 73.1% 44.0% 29.1% 98.6%
2005 73.8% 46.9% 26.9% 98.2%
2006 70.2% 46.6% 23.6% 95.9%
2007 68.0% 46.5% 21.5% 86.0%
2008 69.8% 44.6% 25.2% 67.4%
2009 77.2% 43.9% 33.3% 41.0%
2010 75.3% 44.9% 30.4% 9.3%
         
(1) 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 2006 and prior consumer loan assignments, the risk of a material forecast variance is modest, as we have currently realized in excess of 95% 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 declined during the 2003 through 2007 period as we increased advance rates during this period in response to a more difficult competitive environment. During 2008 and 2009, the spread increased as the competitive environment improved, and we reduced advance rates. In addition, during 2009, the spread was positively impacted by better than expected consumer loan performance. The decline in the spread for 2010 consumer loan assignments reflects advance rate increases implemented during the last four months of 2009 and the first quarter of 2010 to increase unit volume as a result of an increase in the amount of capital available to us.

The following table presents forecasted consumer loan collection rates, advance rates (includes amounts paid to acquire purchased loans), and the spread (the forecasted collection rate less the advance rate) as of June 30, 2010 for purchased loans and dealer loans separately. Payments of dealer holdback and accelerated dealer holdback are not included in the advance percentage paid to the dealer-partner. All amounts are presented as a percentage of the initial balance of the consumer loan (principal + interest).
  Consumer Loan Assignment Year Forecasted Collection % Advance % Spread %
Purchased loans 2007 68.1% 48.6% 19.5%
  2008 68.9% 46.3% 22.6%
  2009 77.3% 44.9% 32.4%
  2010 75.2% 47.1% 28.1%
         
Dealer loans 2007 67.9% 45.9% 22.0%
  2008 70.4% 43.6% 26.8%
  2009 77.2% 43.6% 33.6%
  2010 75.3% 44.6% 30.7%

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. 

Consumer Loan Volume

Our ability to maintain and grow consumer loan volume is impacted by our pricing strategy, the number of dealer-partners actively participating in our programs, and the competitive environment. The following table summarizes changes in consumer loan assignment volume in each of the last six 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, 2009 -13.0% -28.9%
June 30, 2009 -16.2% -33.5%
September 30, 2009 -5.7% -13.0%
December 31, 2009 7.6% 5.9%
March 31, 2010 11.2% 21.6%
June 30, 2010 22.7% 42.2%
     
(1)  Represents payments made to dealer-partners for advances on dealer loans and the acquisition of purchased loans. Payments of dealer holdback and accelerated dealer holdback are not included. 

Dollar and unit volume increased during the first two quarters of 2010 as compared to the same periods in 2009 due to pricing changes implemented during the last four months of 2009 and the first quarter of 2010 that reduced per unit profitability in exchange for increased unit volume.

With the amount of capital available to us, we are in position to grow year over year unit volumes. We will continue to monitor unit volumes and will make additional pricing changes with an objective to maximize economic profit given the capital we have available. Future growth rates will partially depend on how unit volumes respond to pricing changes, which will be influenced to a large degree by how quickly competition returns to our market.  

The following table summarizes the changes in consumer loan unit volume and active dealer-partners:

  Three Months Ended June 30,
  2010 2009 % change
       
Consumer loan unit volume  32,536  26,519 22.7%
Active dealer-partners (1)  2,364  2,304 2.6%
Average volume per active dealer-partner  13.8  11.5 20.0%
       
Consumer loan unit volume from dealer-partners active both periods   24,285  21,427 13.3%
Dealer-partners active both periods  1,530  1,530  --
Average volume per dealer-partners active both periods  15.9  14.0 13.3%
       
Consumer loan unit volume from new dealer-partners  1,266  1,583 -20.0%
New active dealer-partners (2)  219  276 -20.7%
Average volume per new active dealer-partners  5.8  5.7 1.8%
       
Attrition (3) -19.2% -28.9%  
       
(1)  Active dealer-partners are dealer-partners who have received funding for at least one dealer loan or purchased loan during the period.
       
(2)  New active dealer-partners are dealer-partners who enrolled in our program and have received funding for their first dealer loan or purchased loan from us during the period.
       
(3)  Attrition is measured according to the following formula: decrease in consumer loan unit volume from dealer-partners who have received funding for at least one dealer loan or purchased loan during the comparable period of the prior year but did not receive funding for any dealer loans or purchased loans during the current period divided by prior year comparable period consumer loan unit volume.

Consumer loans are assigned to us through either our portfolio program or our purchase program. The following table summarizes the portion of our consumer loan volume that was assigned to us through our purchase program:
  Three Months Ended June 30, Six Months Ended June 30,
  2010 2009 2010 2009
         
New purchased loan unit volume as a percentage of total unit volume 9.5% 14.0% 9.3% 16.1%
         
New purchased loan dollar volume as a percentage of total dollar volume 11.5% 17.0% 11.3% 19.4%

For the three and six months ended June 30, 2010, new purchased loan unit and dollar volume as a percentage of total unit and dollar volume, respectively, decreased as compared to 2009 primarily due to the continued impact of program enrollment eligibility changes we made in 2008, which restricts new dealer-partners' access to the purchase program.

As of June 30, 2010 and December 31, 2009, the net purchased loans receivable balance was 23.4% and 27.5%, respectively, of the total net loans receivable balance.

Adjusted Financial Results

Adjusted financial results are provided to help shareholders understand our financial performance. The financial data below is non-GAAP, unless labeled otherwise. We use adjusted financial information internally to measure financial performance and to determine incentive compensation. The table below shows our results following adjustments to reflect non-GAAP accounting methods. Material adjustments are explained in the table footnotes and the subsequent "Floating Yield Adjustment" and "Program Fee Yield Adjustment" sections. Measures such as adjusted average capital, adjusted net income, adjusted net income per diluted share, adjusted net income plus interest expense after-tax, adjusted return on capital, adjusted revenue, operating expenses, and economic profit are all non-GAAP financial measures. These non-GAAP financial measures should be viewed in addition to, and not as an alternative for, our reported results prepared in accordance with GAAP.

Adjusted financial results for the three and six months ended June 30, 2010, compared to the same periods in 2009, include the following:
     
  Three Months Ended June 30,  Six Months Ended June 30,
(Dollars in thousands, except per share data) 2010 2009 % Change 2010 2009 % Change
Adjusted average capital  $ 1,068,163  $ 1,007,336 6.0%  $ 1,039,816  $ 1,002,366 3.7%
Adjusted net income  $ 41,729  $ 30,131 38.5%  $ 77,241  $ 54,845 40.8%
Adjusted interest expense after-tax  $ 7,728  $ 4,736 63.2%  $ 15,102  $ 9,941 51.9%
Adjusted net income plus interest expense after-tax  $ 49,457  $ 34,867 41.8%  $ 92,343  $ 64,786 42.5%
Adjusted return on capital 18.5% 13.9% 33.1% 17.8% 12.9% 38.0%
Cost of capital 7.7% 6.6% 16.7% 7.8% 6.2% 25.8%
Economic profit  $ 28,799  $ 18,493 55.7%  $ 51,835  $ 33,379 55.3%
GAAP diluted weighted average shares outstanding  31,601,027  31,423,187 0.6%  31,600,586  31,285,734 1.0%
Adjusted net income per diluted share  $ 1.32  $ 0.96 37.5%  $ 2.44  $ 1.75 39.4%

Economic profit increased 55.7% and 55.3% for the three and six months ended June 30, 2010, respectively, as compared to the same periods in 2009. Economic profit is a function of the return on capital in excess of the cost of capital and the amount of capital invested in the business. The following table summarizes the impact each of these components had on the increase in economic profit for the three and six months ended June 30, 2010, as compared to the same periods in 2009:
  Year over Year Change in Economic Profit
(Dollars in thousands) Three Months Ended June 30, 2010 Six Months Ended June 30, 2010
Increase in adjusted return on capital  $ 12,591  $ 25,137
Increase in cost of capital  (3,322)  (7,928)
Increase in adjusted average capital  1,037  1,247
Increase in economic profit  $ 10,306  $ 18,456

The increases in economic profit for the three and six months ended June 30, 2010, as compared to the same periods in 2009, were primarily the result of increases in our adjusted returns on capital, which increased 470 basis points for the three month period and 480 basis points for the six month period primarily due to the following:
  • Finance charges increased adjusted returns on capital by 300 basis points for the three month period and 350 basis points for the six month period, as compared to the same periods in 2009, primarily due to higher yields on more recent consumer loan assignments.
  • Operating expenses increased adjusted returns on capital by 90 basis points for the three month period and 70 basis points for the six month period, as compared to the same periods in 2009, primarily due to reduced expenses related to information technology, stock compensation, and legal costs.
  • Other income increased adjusted returns on capital by 90 basis points for the three month period and 60 basis points for the six month period, as compared to the same periods in 2009, as a result of $2.1 million (after-tax) of income recognized during the second quarter of 2010 related to an arrangement with one of our third party vehicle service contract providers. This arrangement was discontinued in 2008 and no additional income is expected beyond the amount recognized to date. While we continue to generate income from vehicle service contracts, such amounts are captured through VSC Re and recorded over the life of the contracts.

The increases in adjusted returns on capital were partially offset by a 120 basis point and 150 basis point increase in our cost of capital for the three and six months ended June 30, 2010, respectively, as compared to the same periods in 2009. The increases in our cost of capital were primarily due to an increase in our average cost of debt primarily due to the issuance of our senior notes during the first quarter of 2010.

The following table shows adjusted revenue and operating expenses as a percentage of adjusted average capital and the percentage change in adjusted average capital for each of the last eight quarters, compared to the same periods in the prior year:

  Three Months Ended
  Jun. 30, 2010 Mar. 31, 2010 Dec. 31, 2009 Sept. 30, 2009 Jun. 30, 2009 Mar. 31, 2009 Dec. 31, 2008 Sept. 30, 2008
Adjusted revenue as a percentage of adjusted average capital 38.7% 37.8% 37.7% 36.6% 32.7% 30.7% 30.2% 28.9%
                 
Operating expenses as a percentage of adjusted average capital 9.3% 10.9% 11.2% 11.3% 10.7% 11.6% 11.1% 10.8%
                 
Adjusted return on capital 18.5% 17.0% 16.7% 16.0% 13.9% 12.0% 12.1% 11.4%
                 
Percentage change in adjusted average capital compared to the same period in the prior year 6.0% 1.4% -2.4% -3.0% 1.9% 15.2% 30.4% 42.3%
                 

The following tables show how non-GAAP measures reconcile to GAAP measures. All after-tax adjustments are calculated using a 37% tax rate as we estimate that to be our long term average effective tax rate. Amounts do not recalculate due to rounding.
  Three Months Ended
(Dollars in thousands) Jun. 30, 2010 Mar. 31, 2010 Dec. 31, 2009 Sept. 30, 2009 Jun. 30, 2009 Mar. 31, 2009 Dec. 31, 2008 Sept. 30, 2008
                 
Adjusted net income                 
GAAP net income   $ 49,040  $ 32,010  $ 40,335  $ 40,734  $ 36,185  $ 29,001  $ 18,556  $ 20,657
Floating yield adjustment (after-tax)  (330)  2,349  (4,679)  (4,617)  (5,882)  (4,345)  4,125  1,183
Program fee yield adjustment (after-tax)  79  115  121  152  203  320  372  506
Loss (gain) from discontinued United Kingdom segment (after-tax)  25  5  (263)  78  (35)  11  221  (326)
Interest expense related to interest rate swap agreement (after-tax)  --   --   (68)  (94)  (147)  (213)  242  (179)
Adjustment to record taxes at 37% (1)  (7,085)  1,033  62  (1,562)  (193)  (60)  56  419
Adjusted net income  $ 41,729  $ 35,512  $ 35,508  $ 34,691  $ 30,131  $ 24,714  $ 23,572  $ 22,260
                 
Adjusted net income per diluted share   $ 1.32  $ 1.12  $ 1.11  $ 1.10  $ 0.96  $ 0.79  $ 0.76  $ 0.72
Diluted weighted average shares outstanding  31,601,027  31,584,326  31,868,441  31,539,119  31,423,187  31,180,146  31,038,088  31,024,455
                 
Adjusted revenue                
GAAP total revenue  $ 111,779  $ 103,262  $ 100,135  $ 100,268  $ 92,373  $ 87,888  $ 86,296  $ 80,107
Floating yield adjustment  (524)  3,729  (7,426)  (7,329)  (9,336)  (6,898)  6,546  1,880
Program fee yield adjustment  125  182  191  242  322  507  590  804
Provision for credit losses  (1,782)  (6,433)  4,942  3,433  3,766  (167)  (14,252)  (8,278)
Provision for claims  (6,282)  (5,212)  (4,513)  (5,148)  (4,829)  (4,809)  (2,650)  13
Adjusted revenue  $ 103,316  $ 95,528  $ 93,329  $ 91,466  $ 82,296  $ 76,521  $ 76,530  $ 74,526
                 
Adjusted average capital                
GAAP average debt  $ 509,867  $ 492,069  $ 510,123  $ 562,663  $ 604,863  $ 624,279  $ 665,635  $ 706,637
GAAP average shareholders' equity 553,297 514,364 474,984 428,377 388,242 352,562 331,402 308,990
Floating yield adjustment 5,485 5,619 5,394 10,134 15,243 21,829 18,643 18,002
Program fee yield adjustment (486) (583) (697) (834) (1,012) (1,274) (1,609) (2,048)
Adjusted average capital  $ 1,068,163  $ 1,011,469  $ 989,804  $ 1,000,340  $ 1,007,336  $ 997,396  $ 1,014,071  $ 1,031,581
                 
Adjusted revenue as a percentage of adjusted average capital 38.7% 37.8% 37.7% 36.6% 32.7% 30.7% 30.2% 28.9%
                 
Adjusted return on capital                 
Adjusted net income  $ 41,729  $ 35,512  $ 35,508  $ 34,691  $ 30,131  $ 24,714  $ 23,572  $ 22,260
Adjusted interest expense (after-tax)   7,728  7,374  5,767  5,225  4,736  5,205  6,994  7,081
Adjusted net income plus interest expense (after-tax)  $ 49,457  $ 42,886  $ 41,275  $ 39,916  $ 34,867  $ 29,919  $ 30,566  $ 29,341
                 
 Adjusted return on capital (2) 18.5% 17.0% 16.7% 16.0% 13.9% 12.0% 12.1% 11.4%
                 
Economic profit                
Adjusted return on capital 18.5% 17.0% 16.7% 16.0% 13.9% 12.0% 12.1% 11.4%
Cost of capital (3) 7.7% 7.9% 7.3% 6.9% 6.6% 6.0% 6.3% 6.5%
Adjusted return on capital in excess of cost of capital 10.8% 9.1% 9.4% 9.1% 7.3% 6.0% 5.8% 4.9%
Adjusted average capital  $ 1,068,163  $ 1,011,469  $ 989,804  $ 1,000,340  $ 1,007,336  $ 997,396  $ 1,014,071  $ 1,031,581
 Economic profit  $ 28,799  $ 23,036  $ 23,205  $ 22,515  $ 18,493  $ 14,886  $ 14,559  $ 12,628
                 
Operating expenses                
GAAP salaries and wages  $ 14,050  $ 16,110  $ 16,395  $ 16,862  $ 16,515  $ 17,121  $ 17,788  $ 16,766
GAAP general and administrative  5,920  6,542  7,633  7,869  6,894  7,995  6,795  6,977
GAAP sales and marketing  4,834  4,810  3,788  3,533  3,566  3,921  3,446  4,103
Operating expenses  $ 24,804  $ 27,462  $ 27,816  $ 28,264  $ 26,975  $ 29,037  $ 28,029  $ 27,846
                 
Operating expenses as a percentage of adjusted average capital 9.3% 10.9% 11.2% 11.3% 10.7% 11.6% 11.1% 10.8%
                 
Percentage change in adjusted average capital compared to the same period in the prior year 6.0% 1.4% -2.4% -3.0% 1.9% 15.2% 30.4% 42.3%
   
  Six Months Ended June 30,
(Dollars in thousands, except per share data) 2010 2009
     
Adjusted net income     
GAAP net income   $ 81,050  $ 65,186
Floating yield adjustment (after-tax)  2,019  (10,227)
Program fee yield adjustment (after-tax)  194  523
Loss (gain) from discontinued United Kingdom segment (after-tax)  30  (24)
Interest expense related to interest rate swap agreement  --  (360)
Adjustment to record taxes at 37%  (6,052)  (253)
Adjusted net income  $ 77,241  $ 54,845
     
Adjusted net income per diluted share   $ 2.44  $ 1.75
Diluted weighted average shares outstanding  31,600,586  31,285,734
     
Adjusted average capital    
GAAP average debt  $ 500,968  $ 614,571
GAAP average shareholders' equity 533,830 370,402
Floating yield adjustment 5,553 18,536
Program fee yield adjustment (535) (1,143)
 Adjusted average capital  $ 1,039,816  $ 1,002,366
     
Adjusted return on capital     
Adjusted net income  $ 77,241  $ 54,845
Adjusted interest expense after-tax   15,102  9,941
 Adjusted net income plus interest expense after-tax  $ 92,343  $ 64,786
     
 Adjusted return on capital (2) 17.8% 12.9%
     
Economic profit    
Adjusted return on capital 17.8% 12.9%
Cost of capital (3) 7.8% 6.2%
Adjusted return on capital in excess of cost of capital 10.0% 6.7%
Adjusted average capital  $ 1,039,816  $ 1,002,366
 Economic profit  $ 51,835  $ 33,379
     
(1)  The adjustment for the three months ended June 30, 2010 is primarily related to the reversal of reserves for uncertain tax positions and associated interest as a result of the completion of the IRS audit during the period, which reduced our effective tax rate under GAAP.
     
(2)  Adjusted return on capital is defined as annualized adjusted net income plus adjusted interest expense after-tax divided by adjusted average capital.
     
(3)  The cost of capital includes both a cost of equity and a cost of debt. The cost of equity capital is determined based on a formula that considers the risk of the business and the risk associated with our use of debt. The formula utilized for determining the cost of equity capital is as follows: (the average 30 year treasury rate + 5%) + [(1 – tax rate) x (the average 30 year treasury rate + 5% – pre-tax average cost of debt rate) x average debt/(average equity + average debt x tax rate)]. For the periods presented, the average 30 year treasury rate and the adjusted pre-tax average cost of debt were as follows:
  Three Months Ended
  Jun. 30, 2010 Mar. 31, 2010 Dec. 31, 2009 Sept. 30, 2009 Jun. 30, 2009 Mar. 31, 2009 Dec. 31, 2008 Sept. 30, 2008
                 
Average 30 year treasury rate 4.4% 4.6% 4.3% 4.2% 4.1% 3.5% 3.8% 4.5%
                 
Adjusted pre-tax average cost of debt 9.6% 9.5% 7.2% 5.9% 5.0% 5.3% 6.7% 6.4%
  Six Months Ended
  Jun. 30, 2010 Jun. 30, 2009
     
Average 30 year treasury rate 4.5% 3.8%
     
Adjusted pre-tax average cost of debt 9.6% 5.1%

Floating Yield Adjustment

The purpose of this adjustment is to modify the calculation of our GAAP-based finance charge revenue so that favorable and unfavorable changes in expected cash flows from loans receivable are treated consistently. To make the adjustment understandable, we must first explain how GAAP requires us to account for finance charge revenue, our primary revenue source.

Finance charge revenue equals the cash inflows from our loan portfolio less cash outflows to acquire the loans. Our GAAP finance charge revenue is based on estimates of future cash flows and is recognized on a level-yield basis over the estimated life of the loan. With the level-yield approach, the amount of finance charge revenue recognized from a loan in a given period, divided by the loan asset, is a constant percentage. Under GAAP, favorable changes in expected cash flows are treated as increases to the yield and are recognized over time, while unfavorable changes are recorded as a current period expense. The non-GAAP methodology that we use (the "floating yield" method) is identical to the GAAP approach except that, under the "floating yield" method, all changes in expected cash flows (both positive and negative) are treated as yield adjustments and therefore impact earnings over time. The GAAP treatment always results in a lower carrying value of the loan receivable asset, but may result in either higher or lower earnings for any given period depending on the timing and amount of expected cash flow changes. 

We believe adjusted earnings, which include the floating yield adjustment, are a more accurate reflection of the performance of our business, since both favorable and unfavorable changes in estimated cash flows are treated consistently.

Program Fee Yield Adjustment

The purpose of this adjustment is to make revenue from program fees comparable across time periods. In 2001, we began charging dealer-partners a monthly program fee. Effective January 1, 2007, we implemented a change in the way these fees are charged designed to positively impact dealer-partner attrition. We continue to charge a monthly program fee, but instead of collecting the fee in the current period, we collect it from future dealer holdback payments. 

As a result of this change, (as of January 1, 2007) we record program fees on a GAAP basis as a yield adjustment, recognizing these fees as finance charge revenue over the term of the dealer loan because collection is dependent on the future cash flows of the loan. Previously, we had recorded the fee as program fee revenue in the month the fee was charged. The current GAAP treatment is more consistent with the cash economics of the business.

To allow for proper comparisons between periods, we make an adjustment to our financial results as though program fees had always been recorded as a yield adjustment. The program fee yield adjustment is immaterial for 2010 and future periods.

Cautionary Statement Regarding Forward-Looking Information

We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all of our forward-looking statements. Statements in this release that are not historical facts, such as those using terms like "may," "will," "should," "believe," "expect," "anticipate," "assume," "forecast," "estimate," "intend," "plan," "target" and those regarding our future results, plans and objectives, are "forward-looking statements" within the meaning of the federal securities laws. These forward-looking statements represent our outlook only as of the date of this release. Actual results could differ materially from these forward-looking statements since the statements are based on our current expectations, which are subject to risks and uncertainties. Factors that might cause such a difference include, but are not limited to, the factors set forth in Item 1A to our Form 10-K for the year ended December 31, 2009, other risk factors discussed herein or listed from time to time in our reports filed with the Securities and Exchange Commission and the following:
  • Our inability to accurately forecast and estimate the amount and timing of future collections could have a material adverse effect on results of operations.
  • We may be unable to execute our business strategy due to current economic conditions.
  • We may be unable to continue to access or renew funding sources and obtain capital needed to maintain and grow our business.
  • The terms of our debt limit how we conduct our business.
  • The conditions of the U.S. and international capital markets may adversely affect lenders with which we have relationships, causing us to incur additional costs and reducing our sources of liquidity, which may adversely affect our financial position, liquidity and results of operations.
  • Our substantial debt could negatively impact our business, prevent us from satisfying our debt obligations and adversely affect our financial condition.
  • Due to competition from traditional financing sources and non-traditional lenders, we may not be able to compete successfully.
  • We may not be able to generate sufficient cash flows to service our outstanding debt and fund operations and may be forced to take other actions to satisfy our obligations under such debt.
  • Interest rate fluctuations may adversely affect our borrowing costs, profitability and liquidity.
  • Reduction in our credit rating could increase the cost of our funding from, and restrict our access to, the capital markets and adversely affect our liquidity, financial condition and results of operations.
  • We may incur substantially more debt and other liabilities. This could exacerbate further the risks associated with our current debt levels.
  • The regulation to which we are or may become subject could result in a material adverse effect on our business.
  • Adverse changes in economic conditions, the automobile or finance industries, or the non-prime consumer market could adversely affect our financial position, liquidity and results of operations, the ability of key vendors that we depend on to supply us with services, and our ability to enter into future financing transactions.
  • Litigation we are involved in from time to time may adversely affect our financial condition, results of operations and cash flows.
  • Our operations are dependent on technology.
  • We are dependent on our senior management and the loss of any of these individuals or an inability to hire additional team members could adversely affect our ability to operate profitably.
  • Our reputation is a key asset to our business, and our business may be affected by how we are perceived in the marketplace.
  • The concentration of our dealer-partners in several states could adversely affect us.
  • Failure to properly safeguard confidential consumer information could subject us to liability, decrease our profitability and damage our reputation.
  • Our founder controls a majority of our common stock, has the ability to control matters requiring shareholder approval and has interests which may conflict with the interests of our other security holders.
  • Reliance on our outsourced business functions could adversely affect our business.
  • Natural disasters, acts of war, terrorist attacks and threats or the escalation of military activity in response to these attacks or otherwise may negatively affect our business, financial condition and results of operations.

Other factors not currently anticipated by management may also materially and adversely affect our results of operations. We do not undertake, and expressly disclaim any obligation, to update or alter our statements whether as a result of new information, future events or otherwise, except as required by applicable law.

Description of Credit Acceptance Corporation

Since 1972, Credit Acceptance has provided auto loans to consumers, regardless of their credit history. Our product is offered through a nationwide network of automobile dealers who benefit from sales of vehicles to consumers who otherwise could not obtain financing; from repeat and referral sales generated by these same customers; and from sales to customers responding to advertisements for our product, but who actually end up qualifying for traditional financing.

Without our product, consumers are often unable to purchase a vehicle or they purchase an unreliable one. Further, as we report to the three national credit reporting agencies, an important ancillary benefit of our program is that we provide a significant number of our consumers with an opportunity to improve their lives by improving their credit score and move on to more traditional sources of financing. Credit Acceptance is publicly traded on the NASDAQ under the symbol CACC. For more information, visit creditacceptance.com.
CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
         
 (Dollars in thousands, except per share data) Three Months Ended June 30,  Six Months Ended June 30, 
  2010 2009 2010 2009
Revenue:    
Finance charges  $ 95,549  $ 81,124  $ 185,212  $ 157,850
Premiums earned  8,245  7,201  15,949  13,661
Other income  7,985  4,048  13,880  8,750
Total revenue  111,779  92,373  215,041  180,261
Costs and expenses:        
Salaries and wages   14,050  16,515  30,160  33,636
General and administrative  5,920  6,894  12,462  14,889
Sales and marketing  4,834  3,566  9,644  7,487
Provision for credit losses  1,790  (3,790)  8,216  (3,626)
Interest  12,267  7,285  23,972  15,208
Provision for claims  6,282  4,829  11,494  9,638
Total costs and expenses  45,143  35,299  95,948  77,232
Income from continuing operations before provision for income taxes  66,636  57,074  119,093  103,029
Provision for income taxes  17,571  20,924  38,013  37,867
Income from continuing operations   49,065  36,150  81,080  65,162
Discontinued operations        
(Loss) gain from discontinued United Kingdom operations  (25)  49  (30)  34
Provision for income taxes  --  14  --  10
(Loss) gain from discontinued operations  (25)  35  (30)  24
Net income  $ 49,040  $ 36,185  $ 81,050  $ 65,186
         
Net income per common share:        
Basic  $ 1.57  $ 1.18  $ 2.61  $ 2.14
Diluted  $ 1.55  $ 1.15  $ 2.56  $ 2.08
         
Income from continuing operations per common share:        
Basic  $ 1.57  $ 1.18  $ 2.61  $ 2.14
Diluted  $ 1.55  $ 1.15  $ 2.57  $ 2.08
         
(Loss) gain from discontinued operations per common share:        
Basic  $ --   $ --   $ --   $ -- 
Diluted  $ --   $ --   $ --   $ -- 
         
Weighted average shares outstanding:        
Basic  31,172,229  30,600,531  31,107,721  30,510,439
Diluted  31,601,027  31,423,187  31,600,586  31,285,734
 
CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
     
(Dollars in thousands, except per share data) As of 
  June 30, 2010 December 31, 2009
  (Unaudited)  
ASSETS:    
Cash and cash equivalents   $ 1,537  $ 2,170
Restricted cash and cash equivalents  63,859  82,456
Restricted securities available for sale  2,893  3,121
     
Loans receivable (including $11,179 and $12,674 from affiliates as of June 30, 2010 and December 31, 2009, respectively)  1,259,647  1,167,558
Allowance for credit losses   (124,871)  (117,545)
Loans receivable, net   1,134,776  1,050,013
     
Property and equipment, net   18,344  18,735
Income taxes receivable  6,995  3,956
Other assets   26,414  15,785
Total Assets   $ 1,254,818  $ 1,176,236
     
LIABILITIES AND SHAREHOLDERS' EQUITY:    
Liabilities:    
Accounts payable and accrued liabilities   $ 79,042  $ 77,295
Line of credit  4,300  97,300
Secured financing   240,500  404,597
Mortgage note and capital lease obligations  4,665  5,082
Senior notes  244,007  --
Deferred income taxes, net  100,686  93,752
Total Liabilities   673,200  678,026
     
     
Shareholders' Equity:    
Preferred stock, $.01 par value, 1,000,000 shares authorized, none issued  --  --
Common stock, $.01 par value, 80,000,000 shares authorized, 31,024,015 and 31,038,217 shares issued and outstanding as of June 30, 2010 and December 31, 2009, respectively  310  311
Paid-in capital   25,952  24,370
Retained earnings   555,483  474,433
Accumulated other comprehensive loss, net of tax of $75 and $526 at June 30, 2010 and December 31, 2009, respectively  (127)  (904)
Total Shareholders' Equity   581,618  498,210
Total Liabilities and Shareholders' Equity   $ 1,254,818  $ 1,176,236
CONTACT:  Credit Acceptance Corporation          Investor Relations:          Douglas W. Busk, Senior Vice President and Treasurer          (248) 353-2700 Ext. 4432          IR@creditacceptance.com

More from Press Releases

NFL Pushes for Regulation Following Supreme Court's Sports Gambling Ruling

NFL Pushes for Regulation Following Supreme Court's Sports Gambling Ruling

21st Century Fox Scoops Up Local News Stations

21st Century Fox Scoops Up Local News Stations

Walmart CEO: 'We Are Transforming Globally' With Flipkart

Walmart CEO: 'We Are Transforming Globally' With Flipkart

Three-Part FREE Webinar Series

Three-Part FREE Webinar Series

March 24 Full-Day Course Offering: Professional Approach to Trading SPX

March 24 Full-Day Course Offering: Professional Approach to Trading SPX