Yahoo Finance Credit Acceptance Announces Fourth Quarter and Full Year 2022 Results
Southfield, Michigan, Jan. 31, 2023 (GLOBE NEWSWIRE) -- Credit Acceptance Corporation (Nasdaq: CACC) (referred to as the “Company”, “Credit Acceptance”, “we”, “our”, or “us”) today announced consolidated net income of $127.3 million, or $9.58 per diluted share, for the three months ended December 31, 2022 compared to consolidated net income of $217.6 million, or $14.60 per diluted share, for the same period in 2021. For the year ended December 31, 2022, consolidated net income was $535.8 million, or $39.32 per diluted share, compared to consolidated net income of $958.3 million, or $59.52 per diluted share, for the same period in 2021.
Adjusted net income, a non-GAAP financial measure, for the three months ended December 31, 2022 was $156.1 million, or $11.74 per diluted share, compared to $212.6 million, or $14.26 per diluted share, for the same period in 2021. For the year ended December 31, 2022, adjusted net income was $720.1 million, or $52.85 per diluted share, compared to adjusted net income of $826.8 million, or $51.35 per diluted share, for the same period in 2021.
Our results for the fourth quarter of 2022 included:
A decrease in forecasted collection rates for Consumer Loans assigned in 2021 and 2022, which decreased forecasted net cash flows from our loan portfolio by $41.1 million, or 0.5%.
Forecasted profitability per Consumer Loan assignment that significantly exceeded our initial estimates for Consumer Loans assigned in 2018 through 2020 and was significantly less than our initial estimates for Consumer Loans assigned in 2022.
Growth in Consumer Loan assignment volume, as unit and dollar volumes grew 25.6% and 26.2%, respectively, as compared to the fourth quarter of 2021.
Stock repurchases of approximately 208,000 shares, which represented 1.6% of the shares outstanding at the beginning of the quarter.
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 December 31, 2022, with the forecasts as of September 30, 2022, as of December 31, 2021, 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 | December 31, 2022 | September 30, 2022 | December 31, 2021 | Initial | September 30, 2022 | December 31, 2021 | Initial | ||||||||||||||
2013 | 73.5% | 73.4% | 73.4% | 72.0% | 0.1% | 0.1% | 1.5% | ||||||||||||||
2014 | 71.7% | 71.7% | 71.5% | 71.8% | 0.0% | 0.2% | -0.1% | ||||||||||||||
2015 | 65.2% | 65.2% | 65.1% | 67.7% | 0.0% | 0.1% | -2.5% | ||||||||||||||
2016 | 63.8% | 63.8% | 63.6% | 65.4% | 0.0% | 0.2% | -1.6% | ||||||||||||||
2017 | 64.7% | 64.6% | 64.4% | 64.0% | 0.1% | 0.3% | 0.7% | ||||||||||||||
2018 | 65.2% | 65.1% | 65.1% | 63.6% | 0.1% | 0.1% | 1.6% | ||||||||||||||
2019 | 66.6% | 66.5% | 66.5% | 64.0% | 0.1% | 0.1% | 2.6% | ||||||||||||||
2020 | 67.8% | 67.9% | 67.9% | 63.4% | -0.1% | -0.1% | 4.4% | ||||||||||||||
2021 | 66.2% | 66.8% | 66.5% | 66.3% | -0.6% | -0.3% | -0.1% | ||||||||||||||
2022 (2) | 66.3% | 66.5% | — | 67.5% | -0.2% | — | -1.2% | ||||||||||||||
(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.
(2) The forecasted collection rate for 2022 Consumer Loans as of December 31, 2022 includes both Consumer Loans that were in our portfolio as of September 30, 2022 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 | Current Forecast Variance from | ||||||||||||||
2022 Consumer Loan Assignment Period | December 31, 2022 | September 30, 2022 | Initial | September 30, 2022 | Initial | ||||||||||
January 1, 2022 through September 30, 2022 | 65.7% | 66.5% | 67.4% | -0.8% | -1.7% | ||||||||||
October 1, 2022 through December 31, 2022 | 68.2% | — | 67.9% | — | 0.3% | ||||||||||
Consumer Loans assigned in 2013 and 2018 through 2020 have yielded forecasted collection results significantly better than our initial estimates, while Consumer Loans assigned in 2015, 2016, and 2022 have yielded forecasted collection results significantly worse than our initial estimates. For all other assignment years presented, actual results have been close to our initial estimates. For the three months ended December 31, 2022, forecasted collection rates declined for Consumer Loans assigned in 2021 and 2022 and were generally consistent with expectations at the start of the period for all other assignment years presented. For the year ended December 31, 2022, forecasted collection rates improved for Consumer Loans assigned in 2014, 2016, and 2017, declined for Consumer Loans assigned in 2021 and 2022, and were generally consistent with expectations at the start of the period for all other assignment years presented.
The changes in forecasted collection rates for the three months and year ended December 31, 2022 and 2021 impacted forecasted net cash flows (forecasted collections less forecasted dealer holdback payments) as follows:
(In millions) | For the Three Months Ended December 31, | For the Years Ended December 31, | ||||||||||||
Increase (Decrease) in Forecasted Net Cash Flows | 2022 | 2021 | 2022 | 2021 | ||||||||||
Dealer loans | $ | (24.2) | $ | 7.8 | $ | (41.6) | $ | 87.7 | ||||||
Purchased loans | (16.9) | 24.1 | (18.1) | 238.4 | ||||||||||
Total | $ | (41.1) | $ | 31.9 | $ | (59.7) | $ | 326.1 | ||||||
The following table presents information on the average Consumer Loan assignment for each of the last 10 years:
Average | ||||||||
Consumer Loan Assignment Year | Consumer Loan (1) | Advance (2) | Initial Loan Term (in months) | |||||
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 | 20,230 | 8,746 | 55 | |||||
2018 | 22,158 | 9,635 | 57 | |||||
2019 | 23,139 | 10,174 | 57 | |||||
2020 | 24,262 | 10,656 | 59 | |||||
2021 | 25,632 | 11,790 | 59 | |||||
2022 (3) | 27,242 | 12,924 | 60 | |||||
(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.
(3) The averages for 2022 Consumer Loans include both Consumer Loans that were in our portfolio as of September 30, 2022 and Consumer Loans assigned during the most recent quarter. The following table provides averages for each of these segments:
Average | ||||||||
2022 Consumer Loan Assignment Period | Consumer Loan | Advance | Initial Loan Term (in months) | |||||
January 1, 2022 through September 30, 2022 | $ | 27,197 | $ | 12,938 | 59 | |||
October 1, 2022 through December 31, 2022 | 27,400 | 12,875 | 61 | |||||
The profitability of our loans is primarily driven by the amount and timing of the net cash flows we receive from the spread between the forecasted collection rate and the advance rate, less operating expenses and the cost of capital. 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 December 31, 2022, as well as the forecasted collection rates and spread at the time of assignment. 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.
Forecasted Collection % as of | Spread % as of | |||||||||||||||||
Consumer Loan Assignment Year | December 31, 2022 | Initial Forecast | Advance % (1) | December 31, 2022 | Initial Forecast | % of Forecast | ||||||||||||
2013 | 73.5% | 72.0% | 47.6% | 25.9% | 24.4% | 99.8% | ||||||||||||
2014 | 71.7% | 71.8% | 47.7% | 24.0% | 24.1% | 99.6% | ||||||||||||
2015 | 65.2% | 67.7% | 44.5% | 20.7% | 23.2% | 99.1% | ||||||||||||
2016 | 63.8% | 65.4% | 43.8% | 20.0% | 21.6% | 98.6% | ||||||||||||
2017 | 64.7% | 64.0% | 43.2% | 21.5% | 20.8% | 97.3% | ||||||||||||
2018 | 65.2% | 63.6% | 43.5% | 21.7% | 20.1% | 92.7% | ||||||||||||
2019 | 66.6% | 64.0% | 44.0% | 22.6% | 20.0% | 83.7% | ||||||||||||
2020 | 67.8% | 63.4% | 43.9% | 23.9% | 19.5% | 69.6% | ||||||||||||
2021 | 66.2% | 66.3% | 46.0% | 20.2% | 20.3% | 47.7% | ||||||||||||
2022 (3) | 66.3% | 67.5% | 47.4% | 18.9% | 20.1% | 14.6% | ||||||||||||
(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.
(3) The forecasted collection rate, advance rate and spread for 2022 Consumer Loans as of December 31, 2022 include both Consumer Loans that were in our portfolio as of September 30, 2022 and Consumer Loans assigned during the most recent quarter. The following table provides forecasted collection rates, advance rates, and spreads for each of these segments:
Forecasted Collection % as of | Spread % as of | ||||||||||||||
2022 Consumer Loan Assignment Period | December 31, 2022 | Initial Forecast | Advance % | December 31, 2022 | Initial Forecast | ||||||||||
January 1, 2022 through September 30, 2022 | 65.7% | 67.4% | 47.6% | 18.1% | 19.8% | ||||||||||
October 1, 2022 through December 31, 2022 | 68.2% | 67.9% | 47.0% | 21.2% | 20.9% | ||||||||||
The risk of a material change in our forecasted collection rate declines as the Consumer Loans age. For 2018 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 18.9% to 25.9%, on an annual basis, over the last 10 years. The spreads in 2019 and 2020 were positively impacted by Consumer Loan performance, which has exceeded our initial estimates by a greater margin than the other years presented. The decrease in the spread from 2021 to 2022 was primarily the result of the performance of 2022 Consumer Loans, which performed worse than our initial estimates. The increase in the spread from the first nine months of 2022 to the fourth quarter of 2022 was primarily due to Consumer Loan performance, as the performance of Consumer Loans assigned during the first nine months of 2022 has been significantly lower than our initial estimates, while the performance of the Consumer Loans assigned during the fourth quarter of 2022 has exceeded our initial estimates. Additionally, Consumer Loans assigned during the fourth quarter of 2022 had a higher initial spread, due to the advance rate decreasing while the initial forecast increased.
The following table compares our forecast of Consumer Loan collection rates as of December 31, 2022 with the forecasts at the time of assignment, for dealer loans and purchased loans separately:
Dealer Loans | Purchased Loans | |||||||||||||||||
Forecasted Collection Percentage as of (1) | Forecasted Collection Percentage as of (1) | |||||||||||||||||
Consumer Loan Assignment Year | December 31, | Initial | Variance | December 31, | Initial | Variance | ||||||||||||
2013 | 73.4% | 72.1% | 1.3% | 74.3% | 71.6% | 2.7% | ||||||||||||
2014 | 71.6% | 71.9% | -0.3% | 72.5% | 70.9% | 1.6% | ||||||||||||
2015 | 64.5% | 67.5% | -3.0% | 68.9% | 68.5% | 0.4% | ||||||||||||
2016 | 63.0% | 65.1% | -2.1% | 66.0% | 66.5% | -0.5% | ||||||||||||
2017 | 64.0% | 63.8% | 0.2% | 66.3% | 64.6% | 1.7% | ||||||||||||
2018 | 64.6% | 63.6% | 1.0% | 66.4% | 63.5% | 2.9% | ||||||||||||
2019 | 66.3% | 63.9% | 2.4% | 67.2% | 64.2% | 3.0% | ||||||||||||
2020 | 67.7% | 63.3% | 4.4% | 68.0% | 63.6% | 4.4% | ||||||||||||
2021 | 66.0% | 66.3% | -0.3% | 66.7% | 66.3% | 0.4% | ||||||||||||
2022 | 65.8% | 67.3% | -1.5% | 67.4% | 68.0% | -0.6% | ||||||||||||
(1) The forecasted collection rates presented for dealer loans and purchased loans reflect the Consumer Loan classification at the time of assignment. The forecasted collection rates represent 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.
The following table presents forecasted Consumer Loan collection rates, advance rates, and the spread (the forecasted collection rate less the advance rate) as of December 31, 2022 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 % | ||||||||||||
2013 | 73.4% | 47.2% | 26.2% | 74.3% | 51.5% | 22.8% | ||||||||||||
2014 | 71.6% | 47.2% | 24.4% | 72.5% | 51.8% | 20.7% | ||||||||||||
2015 | 64.5% | 43.4% | 21.1% | 68.9% | 50.2% | 18.7% | ||||||||||||
2016 | 63.0% | 42.1% | 20.9% | 66.0% | 48.6% | 17.4% | ||||||||||||
2017 | 64.0% | 42.1% | 21.9% | 66.3% | 45.8% | 20.5% | ||||||||||||
2018 | 64.6% | 42.7% | 21.9% | 66.4% | 45.2% | 21.2% | ||||||||||||
2019 | 66.3% | 43.1% | 23.2% | 67.2% | 45.6% | 21.6% | ||||||||||||
2020 | 67.7% | 43.0% | 24.7% | 68.0% | 45.5% | 22.5% | ||||||||||||
2021 | 66.0% | 45.1% | 20.9% | 66.7% | 47.7% | 19.0% | ||||||||||||
2022 | 65.8% | 46.4% | 19.4% | 67.4% | 50.1% | 17.3% | ||||||||||||
(1) The forecasted collection rates and advance rates presented for dealer loans and purchased loans reflect the Consumer Loan classification at the time of assignment.
(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 decreased from 20.9% in 2021 to 19.4% in 2022 primarily as a result of the performance of the 2022 Consumer Loans in our dealer loan portfolio, which performed worse than our initial estimates by a greater margin than those assigned to us in 2021. The spread on purchased loans decreased from 19.0% in 2021 to 17.3% in 2022 primarily as a result of the performance of the 2022 Consumer Loans in our purchased loan portfolio, which performed worse than our initial estimates, while the performance of the Consumer Loans in our purchase loan portfolio assigned during 2021 has exceeded our initial estimates. Additionally, 2022 Consumer Loans in our purchased loan portfolio had a lower initial spread, primarily due to the advance rate increasing by a greater margin than the initial forecast on 2022 Consumer Loans in our purchased loan portfolio.
Consumer Loan Volume
The following table summarizes changes in Consumer Loan assignment volume in each of the last eight 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, 2021 | -7.5% | -2.2% | ||||
June 30, 2021 | -28.7% | -20.5% | ||||
September 30, 2021 | -29.4% | -17.9% | ||||
December 31, 2021 | -22.6% | -12.7% | ||||
March 31, 2022 | -22.1% | -10.5% | ||||
June 30, 2022 | 5.1% | 22.0% | ||||
September 30, 2022 | 29.3% | 32.1% | ||||
December 31, 2022 | 25.6% | 26.2% | ||||
(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.
Consumer Loan assignment volumes depend on a number of factors including (1) the overall demand for our financing programs, (2) the amount of capital available to fund new loans, and (3) our assessment of the volume that our infrastructure can support. Our pricing strategy is intended to maximize the amount of economic profit we generate, within the confines of capital and infrastructure constraints.
Unit and dollar volumes grew 25.6% and 26.2%, respectively, during the fourth quarter of 2022 as the number of active dealers grew 15.0% and the average unit volume per active dealer grew 9.1%. Unit volume for the 28-day period ended January 28, 2023 grew 39.2% compared to the same period in 2022. The comparable prior periods reflected significant declines in unit volume, which we believe were primarily due to low dealer inventories and elevated used vehicle prices, which we believe were primarily due to the downstream impact of supply chain disruptions in the automotive industry.
The following table summarizes the changes in Consumer Loan unit volume and active dealers:
For the Three Months Ended December 31, | For the Years Ended December 31, | ||||||||||||
2022 | 2021 | % Change | 2022 | 2021 | % Change | ||||||||
Consumer Loan unit volume | 62,074 | 49,427 | 25.6% | 280,467 | 268,730 | 4.4% | |||||||
Active dealers (1) | 8,612 | 7,488 | 15.0% | 11,901 | 11,410 | 4.3% | |||||||
Average volume per active dealer | 7.2 | 6.6 | 9.1% | 23.6 | 23.6 | — | |||||||
Consumer Loan unit volume from dealers active both periods | 47,328 | 42,157 | 12.3% | 250,114 | 250,214 | — | |||||||
Dealers active both periods | 5,337 | 5,337 | — | 8,691 | 8,691 | — | |||||||
Average volume per dealer active both periods | 8.9 | 7.9 | 12.3% | 28.8 | 28.8 | — | |||||||
Consumer loan unit volume from dealers not active both periods | 14,746 | 7,270 | 102.8% | 30,353 | 18,516 | 63.9% | |||||||
Dealers not active both periods | 3,275 | 2,151 | 52.3% | 3,210 | 2,719 | 18.1% | |||||||
Average volume per dealer not active both periods | 4.5 | 3.4 | 32.4% | 9.5 | 6.8 | 39.7% | |||||||
(1) Active dealers are dealers who have received funding for at least one Consumer Loan during the period.
The following table provides additional information on the changes in Consumer Loan unit volume and active dealers:
For the Three Months Ended December 31, | For the Years Ended December 31, | ||||||||||||||||
2022 | 2021 | % Change | 2022 | 2021 | % Change | ||||||||||||
Consumer Loan unit volume from new active dealers | 2,652 | 1,380 | 92.2% | 28,223 | 18,267 | 54.5% | |||||||||||
New active dealers (1) | 775 | 479 | 61.8% | 2,819 | 2,094 | 34.6% | |||||||||||
Average volume per new active dealer | 3.4 | 2.9 | 17.2% | 10.0 | 8.7 | 14.9% | |||||||||||
Attrition (2) | -14.7% | -17.4% | -6.9% | -7.7% | |||||||||||||
(1) New active dealers are dealers who enrolled in our program and have received funding for their first dealer loan or purchased loan from us during the period.
(2) Attrition is measured according to the following formula: decrease in Consumer Loan unit volume from dealers 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.
The following table shows the percentage of Consumer Loans assigned to us as dealer loans and purchased loans for each of the last eight quarters:
Unit Volume | Dollar Volume (1) | |||||||||||
Three Months Ended | Dealer Loans | Purchased Loans | Dealer Loans | Purchased Loans | ||||||||
March 31, 2021 | 65.4% | 34.6% | 62.7% | 37.3% | ||||||||
June 30, 2021 | 66.9% | 33.1% | 64.0% | 36.0% | ||||||||
September 30, 2021 | 69.9% | 30.1% | 66.8% | 33.2% | ||||||||
December 31, 2021 | 71.8% | 28.2% | 68.0% | 32.0% | ||||||||
March 31, 2022 | 72.7% | 27.3% | 68.6% | 31.4% | ||||||||
June 30, 2022 | 74.0% | 26.0% | 70.4% | 29.6% | ||||||||
September 30, 2022 | 74.3% | 25.7% | 70.5% | 29.5% | ||||||||
December 31, 2022 | 73.1% | 26.9% | 69.6% | 30.4% | ||||||||
(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.
As of December 31, 2022 and December 31, 2021, the net dealer loans receivable balance was 64.7% and 61.3%, respectively, of the total net loans receivable balance.
Financial Results
(Dollars in millions, except per share data) | For the Three Months Ended December 31, | For the Years Ended December 31, | |||||||||||||||
2022 | 2021 | % Change | 2022 | 2021 | % Change | ||||||||||||
GAAP average debt | $ | 4,591.1 | $ | 4,671.2 | -1.7% | $ | 4,664.8 | $ | 4,699.9 | -0.7% | |||||||
GAAP average shareholders' equity | 1,635.2 | 1,865.7 | -12.4% | 1,637.5 | 2,214.2 | -26.0% | |||||||||||
Average capital | $ | 6,226.3 | $ | 6,536.9 | -4.8% | $ | 6,302.3 | $ | 6,914.1 | -8.8% | |||||||
GAAP net income | $ | 127.3 | $ | 217.6 | -41.5% | $ | 535.8 | $ | 958.3 | -44.1% | |||||||
Diluted weighted average shares outstanding | 13,294,506 | 14,904,836 | -10.8% | 13,625,081 | 16,100,552 | -15.4% | |||||||||||
GAAP net income per diluted share | $ | 9.58 | $ | 14.60 | -34.4% | $ | 39.32 | $ | 59.52 | -33.9% | |||||||
The decrease in GAAP net income for the three months ended December 31, 2022, as compared to the same period in 2021, was primarily the result of the following:
An increase in provision for credit losses of 403.1% ($104.4 million), primarily due to an increase in provision for credit losses on forecast changes of $110.4 million, due to changes in the amount and timing of forecasted net cash flows primarily due to Consumer Loan performance. Forecasted net cash flows decreased $41.1 million, or 0.5%, during 2022, compared to an increase of $31.9 million, or 0.3%, during 2021. The following table summarizes each component of provision for credit losses:
(In millions) | For the Three Months Ended December 31, | ||||||||||
Provision for Credit Losses | 2022 | 2021 | Change | ||||||||
New Consumer Loan assignments | $ | 60.2 | $ | 66.2 | $ | (6.0) | |||||
Forecast changes | 70.1 | (40.3) | 110.4 | ||||||||
Total | $ | 130.3 | $ | 25.9 | $ | 104.4 | |||||
A decrease in finance charges of 3.3% ($14.2 million), primarily due to a decline in the average balance of our loan portfolio.
An increase in interest expense of 28.0% ($10.8 million), primarily due to an increase in our average cost of debt, which was primarily the result of higher interest rates on recently-completed secured financings.
An increase in other income of 41.5% ($7.6 million), primarily due to:
A $4.0 million increase in ancillary product profit sharing income primarily due to $5.9 million of income recognized in 2022 related to an inception-to-date adjustment to premium recognition timing based on our historical claims experience on Guaranteed Asset Protection ("GAP") contracts.
A $3.4 million increase in interest income earned on restricted cash and cash equivalents primarily due to an increase in benchmark interest rates.
A decrease in provision for income taxes of 46.8% ($31.4 million), primarily due to a decrease in taxable income.
The decrease in GAAP net income for the year ended December 31, 2022, as compared to the same period in 2021, was primarily the result of the following:
An increase in provision for credit losses of 5,631.0% ($473.0 million), primarily due to an increase in provision for credit losses on forecast changes of $494.4 million, due to changes in the amount and timing of forecasted net cash flows primarily due to Consumer Loan performance. Forecasted net cash flows decreased $59.7 million, or 0.7%, during 2022, compared to an increase of $326.1 million, or 3.4%, during 2021. The following table summarizes each component of provision for credit losses:
(In millions) | For the Years Ended December 31, | ||||||||||
Provision for Credit Losses | 2022 | 2021 | Change | ||||||||
New Consumer Loan assignments | $ | 343.7 | $ | 365.1 | $ | (21.4) | |||||
Forecast changes | 137.7 | (356.7) | 494.4 | ||||||||
Total | $ | 481.4 | $ | 8.4 | $ | 473.0 | |||||
A decrease in finance charges of 3.2% ($56.3 million), due to a decline in the average balance of our loan portfolio, partially offset by an increase in the average yield on our loan portfolio. The increase in the average yield was primarily due to the adoption on January 1, 2020, of the GAAP methodology known as the current expected credit loss model, or CECL, which requires us to recognize finance charges on new Consumer Loan assignments using effective interest rates based on contractual future net cash flows, which are significantly in excess of our expected yields.
An increase in operating expenses of 11.1% ($42.6 million), due to:
An increase in salaries and wages expense of 20.1% ($43.9 million), due to:
An increase of $32.2 million, excluding stock-based compensation expense, primarily related to an increase in the number of team members in our engineering department.
An increase of $11.7 million in stock-based compensation expense, primarily related to an $11.5 million reversal of expense during 2021 due to the forfeiture of unvested restricted stock and restricted stock units upon the retirement of our former Chief Executive Officer in May 2021.
An increase in sales and marketing expense of 15.8% ($10.3 million), primarily due to a change in the compensation plan for our sales force in September 2021.
A decrease in general and administrative expense of 11.6% ($11.6 million), primarily due to a decrease in legal expenses. Legal expenses during 2021 included a $27.2 million settlement with the Commonwealth of Massachusetts to settle and fully resolve claims asserted by the Commonwealth of Massachusetts against the Company, while legal expenses during 2022 included a $12.0 million settlement to settle and fully resolve a previously-disclosed putative class action lawsuit.
An increase in other income of 57.1% ($30.3 million), primarily due to:
A $20.4 million increase in ancillary product profit sharing income, primarily due to a decrease in average claim rates on GAP contracts and $5.9 million of income recognized in 2022 related to an inception-to-date adjustment to premium recognition timing based on our historical claims experience on GAP contracts.
A $5.6 million increase in remarketing fee income for fees related to the repossession and remarketing of vehicles, which included $3.1 million of fees charged to dealers in 2022 for repossession activity that occurred from August 2020 through December 2021.
A $5.4 million increase in interest income earned on restricted cash and cash equivalents primarily due to an increase in benchmark interest rates.
A decrease in provision for income taxes of 41.9% ($126.7 million), primarily due to a decrease in taxable income.
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 certain incentive compensation. We also use economic profit as a framework to evaluate business decisions and strategies, with the objective to maximize economic profit over the long term. In addition, effective January 1, 2020, certain debt facilities utilize adjusted financial information for the determination of loan collateral values. 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 “Senior Notes Adjustment” sections. Measures such as adjusted average capital, adjusted net income, adjusted net income per diluted share, adjusted interest expense (after-tax), adjusted net income plus interest expense (after-tax), adjusted return on capital, adjusted revenue, operating expenses, adjusted loans receivable, 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 months and year ended December 31, 2022, compared to the same periods in 2021, include the following:
(Dollars in millions, except per share data) | For the Three Months Ended December 31, | For the Years Ended December 31, | |||||||||||||||||||
2022 | 2021 | % Change | 2022 | 2021 | % Change | ||||||||||||||||
Adjusted average capital | $ | 6,490.2 | $ | 6,648.2 | -2.4% | $ | 6,466.1 | $ | 7,078.4 | -8.7% | |||||||||||
Adjusted net income | $ | 156.1 | $ | 212.6 | -26.6% | $ | 720.1 | $ | 826.8 | -12.9% | |||||||||||
Adjusted interest expense (after-tax) | $ | 38.6 | $ | 30.2 | 27.8% | $ | 130.4 | $ | 128.5 | 1.5% | |||||||||||
Adjusted net income plus interest expense (after-tax) | $ | 194.7 | $ | 242.8 | -19.8% | $ | 850.5 | $ | 955.3 | -11.0% | |||||||||||
Adjusted return on capital | 12.0% | 14.6% | -17.8% | 13.2% | 13.5% | -2.2% | |||||||||||||||
Cost of capital | 6.6% | 5.1% | 29.4% | 5.8% | 5.4% | 7.4% | |||||||||||||||
Economic profit | $ | 88.1 | $ | 158.1 | -44.3% | $ | 476.6 | $ | 574.1 | -17.0% | |||||||||||
Diluted weighted average shares outstanding | 13,294,506 | 14,904,836 | -10.8% | 13,625,081 | 16,100,552 | -15.4% | |||||||||||||||
Adjusted net income per diluted share | $ | 11.74 | $ | 14.26 | -17.7% | $ | 52.85 | $ | 51.35 | 2.9% | |||||||||||
Economic profit decreased 44.3% and 17.0%, respectively, for the three months and year ended December 31, 2022, as compared to the same periods in 2021. 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 changes in economic profit for the three months and year ended December 31, 2022, as compared to the same periods in 2021:
(In millions) | Year over Year Change in Economic Profit | ||||||
For the Three Months Ended December 31, 2022 | For the Year Ended December 31, 2022 | ||||||
Decrease in adjusted average capital | $ | (5.9) | $ | (49.7) | |||
Increase in cost of capital | (22.8) | (25.2) | |||||
Decrease in adjusted return on capital | (41.3) | (22.6) | |||||
Decrease in economic profit | $ | (70.0) | $ | (97.5) | |||
The decrease in economic profit for the three months ended December 31, 2022, as compared to the same period in 2021, was primarily the result of the following:
A decrease in our adjusted return on capital of 260 basis points, primarily due to:
A decrease in the yield used to recognize adjusted finance charges on our loan portfolio decreased our adjusted return on capital by 290 basis points, primarily due to lower yields on more recent Consumer Loan assignments.
An increase in other income increased our adjusted return on capital by 40 basis points, primarily due to:
A $4.0 million increase in ancillary product profit sharing income primarily due to $5.9 million of income recognized in 2022 related to an inception-to-date adjustment to premium recognition timing based on our historical claims experience on GAP contracts.
A $3.4 million increase in interest income earned on restricted cash and cash equivalents primarily due to an increase in benchmark interest rates.
An increase in our cost of capital, primarily due to an increase in the 30-year Treasury rate, which is used in the average cost of equity calculation, and an increase in our cost of debt.
The decrease in economic profit for the year ended December 31, 2022, as compared to the same period in 2021, was primarily the result of the following:
A decrease in our adjusted average capital of 8.7%, primarily due to a decline in the average balance of our loan portfolio.
An increase in our cost of capital, primarily due to an increase in the 30-year Treasury rate, which is used in the average cost of equity calculation
A decrease in our adjusted return on capital of 30 basis points, primarily due to:
An increase in operating expenses decreased our adjusted return on capital by 90 basis points as operating expenses increased by 11.1% while adjusted average capital decreased by 8.7%.
An increase in other income increased our adjusted return on capital by 40 basis points, primarily due to
A $20.4 million increase in ancillary product profit sharing income, primarily due to a decrease in average claim rates on GAP contracts and $5.9 million of income recognized in 2022 related to an inception-to-date adjustment to premium recognition timing based on our historical claims experience on GAP contracts.
A $5.6 million increase in remarketing fee income for fees related to the repossession and remarketing of vehicles, which included $3.1 million of fees charged to dealers in 2022 for repossession activity that occurred from August 2020 through December 2021.
A $5.4 million increase in interest income earned on restricted cash and cash equivalents primarily due to an increase in benchmark interest rates.
The following table shows adjusted revenue and operating expenses as a percentage of adjusted average capital, the adjusted return on capital, and the percentage change in adjusted average capital for each of the last eight quarters, compared to the same period in the prior year:
For the Three Months Ended | ||||||||||||||||||||||||
Dec. 31, 2022 | Sept. 30, 2022 | Jun. 30, 2022 | Mar. 31, 2022 | Dec. 31, 2021 | Sept. 30, 2021 | Jun. 30, 2021 | Mar. 31, 2021 | |||||||||||||||||
Adjusted revenue as a percentage of adjusted average capital (1) | 22.0% | 23.4% | 24.9% | 24.4% | 25.3% | 24.0% | 22.4% | 20.4% | ||||||||||||||||
Operating expenses as a percentage of adjusted average capital (1) | 6.4% | 6.4% | 7.3% | 6.3% | 6.3% | 5.5% | 3.8% | 6.2% | ||||||||||||||||
Adjusted return on capital (1) | 12.0% | 13.1% | 13.6% | 13.9% | 14.6% | 14.2% | 14.3% | 11.0% | ||||||||||||||||
Percentage change in adjusted average capital compared to the same period in the prior year | -2.4% | -8.2% | -12.8% | -10.7% | -7.3% | -2.2% | 4.1% | 5.8% | ||||||||||||||||
(1) Annualized.
The decrease in adjusted revenue as a percentage of adjusted average capital for the three months ended December 31, 2022, as compared to the three months ended September 30, 2022, was due to a decrease in the yield used to recognize adjusted finance charges on our loan portfolio, primarily due to a decline in Consumer Loan performance in the third and fourth quarters of 2022, which decreased our adjusted return on capital by 130 basis points, and lower yields on more recent Consumer Loan assignments.
The following tables provide a reconciliation of non-GAAP measures to GAAP measures. Certain amounts do not recalculate due to rounding.
(Dollars in millions, except per share data) | For the Three Months Ended | |||||||||||||||||||||||||||||||
Dec. 31, 2022 | Sept. 30, 2022 | Jun. 30, 2022 | Mar. 31, 2022 | Dec. 31, 2021 | Sept. 30, 2021 | Jun. 30, 2021 | Mar. 31, 2021 | |||||||||||||||||||||||||
Adjusted net income | ||||||||||||||||||||||||||||||||
GAAP net income | $ | 127.3 | $ | 86.8 | $ | 107.4 | $ | 214.3 | $ | 217.6 | $ | 250.0 | $ | 288.6 | $ | 202.1 | ||||||||||||||||
Floating yield adjustment (after-tax) | (69.3) | (53.7) | (34.3) | (39.2) | (26.1) | (29.8) | (37.9) | (54.7) | ||||||||||||||||||||||||
GAAP provision for credit losses (after-tax) | 100.4 | 138.7 | 113.6 | 18.0 | 20.0 | (6.4) | (23.5) | 16.4 | ||||||||||||||||||||||||
Senior notes adjustment (after-tax) | (0.5) | (0.5) | (0.6) | (0.5) | (0.5) | (0.5) | (0.6) | (0.5) | ||||||||||||||||||||||||
Income tax adjustment (1) | (1.8) | 7.2 | 2.1 | 4.7 | 1.6 | 5.8 | 3.7 | 1.5 | ||||||||||||||||||||||||
Adjusted net income | $ | 156.1 | $ | 178.5 | $ | 188.2 | $ | 197.3 | $ | 212.6 | $ | 219.1 | $ | 230.3 | $ | 164.8 | ||||||||||||||||
Adjusted net income per diluted share (2) | $ | 11.74 | $ | 13.36 | $ | 13.92 | $ | 13.76 | $ | 14.26 | $ | 13.84 | $ | 13.71 | $ | 9.64 | ||||||||||||||||
Diluted weighted average shares outstanding | 13,294,506 | 13,364,160 | 13,517,979 | 14,341,523 | 14,904,836 | 15,829,166 | 16,794,279 | 17,099,058 | ||||||||||||||||||||||||
Adjusted revenue | ||||||||||||||||||||||||||||||||
GAAP total revenue | $ | 459.0 | $ | 460.3 | $ | 457.4 | $ | 455.7 | $ | 463.2 | $ | 470.1 | $ | 471.7 | $ | 451.0 | ||||||||||||||||
Floating yield adjustment | (90.0) | (69.8) | (44.5) | (50.9) | (33.9) | (38.5) | (49.4) | (71.0) | ||||||||||||||||||||||||
GAAP provision for claims | (12.4) | (12.9) | (12.2) | (8.9) | (9.5) | (10.0) | (10.3) | (9.0) | ||||||||||||||||||||||||
Adjusted revenue | $ | 356.6 | $ | 377.6 | $ | 400.7 | $ | 395.9 | $ | 419.8 | $ | 421.6 | $ | 412.0 | $ | 371.0 | ||||||||||||||||
Adjusted average capital | ||||||||||||||||||||||||||||||||
GAAP average debt | $ | 4,591.1 | $ | 4,705.9 | $ | 4,772.9 | $ | 4,589.4 | $ | 4,671.2 | $ | 4,676.6 | $ | 4,750.3 | $ | 4,701.6 | ||||||||||||||||
Deferred debt issuance adjustment | 21.3 | 22.6 | 22.5 | 24.9 | 27.8 | 28.6 | 30.4 | 29.1 | ||||||||||||||||||||||||
Senior notes debt adjustment | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | ||||||||||||||||||||||||
Adjusted average debt | 4,615.8 | 4,731.9 | 4,798.8 | 4,617.7 | 4,702.4 | 4,708.6 | 4,784.1 | 4,734.1 | ||||||||||||||||||||||||
GAAP average shareholders' equity | 1,635.2 | 1,547.8 | 1,538.8 | 1,828.1 | 1,865.7 | 2,224.5 | 2,443.6 | |||||||||||||||||||||||||
