U.S. Markets open in 4 hrs 41 mins

Credit Acceptance Announces Third Quarter 2019 Earnings

Credit Acceptance Announces Third Quarter 2019 Earnings

Southfield, Michigan, Nov. 01, 2019 (GLOBE NEWSWIRE) -- Credit Acceptance Corporation (CACC) (referred to as the “Company”, “Credit Acceptance”, “we”, “our”, or “us”) today announced consolidated net income of $165.4 million, or $8.73 per diluted share, for the three months ended September 30, 2019 compared to consolidated net income of $151.0 million, or $7.75 per diluted share, for the same period in 2018. For the nine months ended September 30, 2019, consolidated net income was $494.2 million, or $26.06 per diluted share, compared to consolidated net income of $422.1 million, or $21.68 per diluted share, for the same period in 2018.

Adjusted net income, a non-GAAP financial measure, for the three months ended September 30, 2019 was $168.4 million, or $8.89 per diluted share, compared to $147.2 million, or $7.56 per diluted share, for the same period in 2018. For the nine months ended September 30, 2019, adjusted net income was $484.9 million, or $25.56 per diluted share, compared to adjusted net income of $401.5 million, or $20.62 per diluted share, for the same period in 2018.

Webcast Details

We will host a webcast on November 4, 2019 at 8:30 a.m. Eastern Time to answer questions related to our third 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 September 30, 2019 with the forecasts as of June 30, 2019, as of December 31, 2018 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   September 30, 2019   June 30, 2019   December 31, 2018   Initial
Forecast
  June 30, 2019   December 31, 2018   Initial
Forecast
2010   77.7 %   77.7 %   77.7 %   73.6 %   0.0 %   0.0 %   4.1 %
2011   74.8 %   74.8 %   74.7 %   72.5 %   0.0 %   0.1 %   2.3 %
2012   73.9 %   73.9 %   73.8 %   71.4 %   0.0 %   0.1 %   2.5 %
2013   73.5 %   73.5 %   73.5 %   72.0 %   0.0 %   0.0 %   1.5 %
2014   71.8 %   71.8 %   71.7 %   71.8 %   0.0 %   0.1 %   0.0 %
2015   65.5 %   65.5 %   65.4 %   67.7 %   0.0 %   0.1 %   -2.2 %
2016   64.1 %   64.2 %   64.2 %   65.4 %   -0.1 %   -0.1 %   -1.3 %
2017   65.0 %   65.1 %   65.5 %   64.0 %   -0.1 %   -0.5 %   1.0 %
2018   65.4 %   65.5 %   65.0 %   63.6 %   -0.1 %   0.4 %   1.8 %
  2019 (2)   64.8 %   64.7 %       64.1 %   0.1 %       0.7 %

(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 2019 Consumer Loans as of September 30, 2019 includes both Consumer Loans that were in our portfolio as of June 30, 2019 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
2019 Consumer Loan Assignment Period   September 30, 2019   June 30, 2019   Initial  Forecast   June 30, 2019   Initial  Forecast
January 1, 2019 through June 30, 2019   65.1 %   64.7 %   64.2 %   0.4 %   0.9 %
July 1, 2019 through September 30, 2019   64.1 %       64.0 %       0.1 %

Consumer Loans assigned in 2010 through 2013, 2017 and 2018 have yielded forecasted collection results materially better than our initial estimates, while Consumer Loans assigned in 2015 and 2016 have yielded forecasted collection results materially worse than our initial estimates. For Consumer Loans assigned in 2014 and 2019, actual results have been close to our initial estimates. For the three months ended September 30, 2019, forecasted collection rates improved for Consumer Loans assigned in 2019 and were generally consistent with expectations at the start of the period for all other assignment years presented. For the nine months ended September 30, 2019, forecasted collection rates improved for Consumer Loans assigned in 2018 and 2019, declined for Consumer Loans assigned in 2017 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 and nine months ended September 30, 2019 and 2018 impacted forecasted net cash flows (forecasted collections less forecasted dealer holdback payments) as follows:

(In millions)   For the Three Months Ended September 30,   For the Nine Months Ended September 30,
Increase (Decrease) in Forecasted Net Cash Flows   2019   2018   2019   2018
Dealer loans   $ (4.2 )   $ (0.1 )   $ (0.3 )   $ 3.5  
Purchased loans   6.8     17.2     32.6     31.0  
Total loans   $ 2.6     $ 17.1     $ 32.3     $ 34.5  

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)
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   20,230   8,746   55
2018   22,158   9,635   57
  2019 (3)   22,942   10,098   57

(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 2019 Consumer Loans include both Consumer Loans that were in our portfolio as of June 30, 2019 and Consumer Loans assigned during the most recent quarter. The following table provides averages for each of these segments:

    Average
2019 Consumer Loan Assignment Period   Consumer Loan   Advance   Initial Loan Term  (in months)
January 1, 2019 through June 30, 2019   $ 22,740     $ 10,023     57 
July 1, 2019 through September 30, 2019   23,423     10,275     58 

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 September 30, 2019.  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 September 30, 2019
 Consumer Loan Assignment Year   Forecasted
Collection %
  Advance % (1)   Spread %   % of Forecast
Realized (2)
2010   77.7 %   44.7 %   33.0 %   99.8 %
2011   74.8 %   45.5 %   29.3 %   99.5 %
2012   73.9 %   46.3 %   27.6 %   99.2 %
2013   73.5 %   47.6 %   25.9 %   98.7 %
2014   71.8 %   47.7 %   24.1 %   97.6 %
2015   65.5 %   44.5 %   21.0 %   93.2 %
2016   64.1 %   43.8 %   20.3 %   81.9 %
2017   65.0 %   43.2 %   21.8 %   64.1 %
2018   65.4 %   43.5 %   21.9 %   38.5 %
  2019 (3)   64.8 %   44.0 %   20.8 %   11.2 %

(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 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 2019 Consumer Loans as of September 30, 2019 include both Consumer Loans that were in our portfolio as of June 30, 2019 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:

    As of September 30, 2019
2019 Consumer Loan Assignment Period   Forecasted
Collection %
  Advance %   Spread %
January 1, 2019 through June 30, 2019   65.1 %   44.1 %   21.0 %
July 1, 2019 through September 30, 2019   64.1 %   43.9 %   20.2 %

The risk of a material change in our forecasted collection rate declines as the Consumer Loans age. For 2015 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 20.3% to 33.0%, on an annual basis, over the last 10 years. The spread was at the high end of this range in 2010, when the competitive environment was unusually favorable, and much lower during other years (2015 through 2019) when competition was more intense. The decrease in the spread from 2018 to 2019 was the result of the performance of 2018 Consumer Loans, which has exceeded our initial estimates by a greater margin than those assigned to us in 2019. The decrease in the spread from the first half of 2019 to the third quarter of 2019 was the result of the performance of Consumer Loans assigned to us during the first half of 2019, which has exceeded our initial estimates by a greater margin than those assigned to us during the third quarter of 2019.


The following table compares our forecast of Consumer Loan collection rates as of September 30, 2019 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   September 30,
 2019
  Initial
Forecast
  Variance   September 30,
 2019
  Initial
Forecast
  Variance
2010   77.6 %   73.6 %   4.0 %   78.7 %   73.1 %   5.6 %
2011   74.6 %   72.4 %   2.2 %   76.3 %   72.7 %   3.6 %
2012   73.7 %   71.3 %   2.4 %   75.9 %   71.4 %   4.5 %
2013   73.4 %   72.1 %   1.3 %   74.4 %   71.6 %   2.8 %
2014   71.6 %   71.9 %   -0.3 %   72.6 %   70.9 %   1.7 %
2015   64.8 %   67.5 %   -2.7 %   69.3 %   68.5 %   0.8 %
2016   63.3 %   65.1 %   -1.8 %   66.7 %   66.5 %   0.2 %
2017   64.3 %   63.8 %   0.5 %   66.5 %   64.6 %   1.9 %
2018   65.0 %   63.6 %   1.4 %   66.3 %   63.5 %   2.8 %
2019   64.6 %   64.0 %   0.6 %   65.2 %   64.2 %   1.0 %

(1)   The forecasted collection rates presented for dealer loans and purchased loans reflect the Consumer Loan classification at the time of assignment.

The following table presents forecasted Consumer Loan collection rates, advance rates, and the spread (the forecasted collection rate less the advance rate) as of September 30, 2019 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 %
2010   77.6 %   44.4 %   33.2 %   78.7 %   47.3 %   31.4 %
2011   74.6 %   45.1 %   29.5 %   76.3 %   49.3 %   27.0 %
2012   73.7 %   46.0 %   27.7 %   75.9 %   50.0 %   25.9 %
2013   73.4 %   47.2 %   26.2 %   74.4 %   51.5 %   22.9 %
2014   71.6 %   47.2 %   24.4 %   72.6 %   51.8 %   20.8 %
2015   64.8 %   43.4 %   21.4 %   69.3 %   50.2 %   19.1 %
2016   63.3 %   42.1 %   21.2 %   66.7 %   48.6 %   18.1 %
2017   64.3 %   42.1 %   22.2 %   66.5 %   45.8 %   20.7 %
2018   65.0 %   42.7 %   22.3 %   66.3 %   45.2 %   21.1 %
2019   64.6 %   43.1 %   21.5 %   65.2 %   45.7 %   19.5 %

(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 22.3% in 2018 to 21.5% in 2019 as a result of the performance of 2018 Consumer Loans in our dealer loan portfolio, which has exceeded our initial estimates by a greater margin than those assigned to us in 2019. The spread on purchased loans decreased from 21.1% in 2018 to 19.5% in 2019 primarily as a result of the performance of 2018 Consumer Loans in our purchased loan portfolio, which has exceeded our initial estimates by a greater margin than those assigned to us in 2019.


Consumer Loan Volume

The following table summarizes changes in Consumer Loan assignment volume in each of the last seven 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, 2018   18.5 %   32.9 %
June 30, 2018   19.8 %   34.7 %
September 30, 2018   9.4 %   20.3 %
December 31, 2018   5.9 %   12.4 %
March 31, 2019   0.4 %   5.1 %
June 30, 2019   0.0 %   5.6 %
September 30, 2019   0.4 %   7.6 %

(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.  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 0.4% and 7.6%, respectively, during the third quarter of 2019 as the number of active dealers grew 10.0% while average unit volume per active dealer declined 9.1%. Dollar volume grew faster than unit volume during the third quarter of 2019 due to an increase in the average advance paid per unit. This increase was the result of an increase in the average size of the Consumer Loans assigned primarily due to increases in the average vehicle selling price and average initial loan term and an increase in purchased loans as a percentage of total unit volume. Unit volume for the one month ended October 31, 2019 declined 6.2% as compared to the same period in 2018.

The following table summarizes the changes in Consumer Loan unit volume and active dealers:

  For the Three Months Ended September 30,   For the Nine Months Ended September 30,
  2019   2018   % Change   2019   2018   % Change
Consumer Loan unit volume 86,331     86,005     0.4 %   291,788     290,976     0.3 %
Active dealers (1) 9,555     8,684     10.0 %   12,553     11,390     10.2 %
Average volume per active dealer 9.0     9.9     -9.1 %   23.2     25.5     -9.0 %
                       
Consumer Loan unit volume from dealers active both periods 65,264     72,044     -9.4 %   242,418     262,703     -7.7 %
Dealers active both periods 5,900     5,900         8,294     8,294      
Average volume per dealer active both periods 11.1     12.2     -9.4 %   29.2     31.7     -7.7 %
                       
Consumer loan unit volume from dealers not active both periods 21,067     13,961     50.9 %   49,370     28,273     74.6 %
Dealers not active both periods 3,655     2,784     31.3 %   4,259     3,096     37.6 %
Average volume per dealer not active both periods 5.8     5.0     16.0 %   11.6     9.1     27.5 %

(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 September 30,   For the Nine Months Ended September 30,
  2019   2018   % Change   2019   2018   % Change
Consumer Loan unit volume from new active dealers 3,455     3,785     -8.7 %   30,632     30,477     0.5 %
New active dealers (1) 951     936     1.6 %   3,183     3,005     5.9 %
Average volume per new active dealer 3.6     4.0     -10.0 %   9.6     10.1     -5.0 %
                       
Attrition (2) -16.2 %   -16.7 %       -9.7 %   -11.9 %    

(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 seven quarters:

    Unit Volume   Dollar Volume (1)
Three Months Ended   Dealer Loans   Purchased Loans   Dealer Loans   Purchased Loans
March 31, 2018   70.1 %   29.9 %   67.4 %   32.6 %
June 30, 2018   69.7 %   30.3 %   66.8 %   33.2 %
September 30, 2018   69.5 %   30.5 %   67.0 %   33.0 %
December 31, 2018   69.4 %   30.6 %   67.4 %   32.6 %
March 31, 2019   67.4 %   32.6 %   65.0 %   35.0 %
June 30, 2019   66.7 %   33.3 %   63.7 %   36.3 %
September 30, 2019   67.2 %   32.8 %   64.1 %   35.9 %

(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 September 30, 2019 and December 31, 2018, the net dealer loans receivable balance was 63.2% and 65.3%, respectively, of the total net loans receivable balance.


Financial Results

  For the Three Months Ended September 30,   For the Nine Months Ended September 30,
(Dollars in millions, except per share data) 2019   2018   % Change   2019   2018   % Change
GAAP average debt $ 4,230.2     $ 3,784.2     11.8 %   $ 4,157.3     $ 3,558.4     16.8 %
GAAP average shareholders' equity 2,297.8     1,885.6     21.9 %   2,137.4     1,736.7     23.1 %
Average capital $ 6,528.0     $ 5,669.8     15.1 %   $ 6,294.7     $ 5,295.1     18.9 %
GAAP net income $ 165.4     $ 151.0     9.5 %   $ 494.2     $ 422.1     17.1 %
Diluted weighted average shares outstanding 18,950,866   19,473,978   -2.7 %   18,967,552   19,472,197   -2.6 %
GAAP net income per diluted share $ 8.73     $ 7.75     12.6 %   $ 26.06     $ 21.68     20.2 %

The increase in GAAP net income for the three months ended September 30, 2019, as compared to the same period in 2018, was primarily the result of the following:

  • An increase in finance charges of 15.5% ($46.9 million) primarily due to growth in our loan portfolio.
  • An increase in operating expenses of 14.3% ($10.2 million) primarily due to:
    • An increase in salaries and wages expense of 16.5% ($6.8 million) comprised of the following:
      • An increase of $4.2 million in cash-based incentive compensation expense primarily due to an improvement in Company performance measures.
      • Excluding the change in cash-based incentive compensation expense, salaries and wages expense increased $2.6 million, primarily related to our support function primarily as a result of an increase in the number of team members.
    • An increase in general and administrative expense of 22.0% ($3.1 million) primarily due to increases in legal and building expenses.
  • An increase in interest expense of 22.6% ($9.3 million) due to increases in the average outstanding debt principal balance and our average cost of debt. The increase in the average outstanding debt principal balance was primarily due to borrowings used to fund the growth in our loan portfolio and stock repurchases. The increase in our average cost of debt was primarily the result of a change in the mix of our outstanding debt.
  • An increase in provision for income taxes of 13.3% ($6.3 million) primarily due to an increase in pre-tax income.
  • An increase in provision for credit losses of 37.9% ($5.3 million) primarily due to Consumer Loan performance during the prior year, which improved by a greater margin than during the current year.

The increase in GAAP net income for the nine months ended September 30, 2019, as compared to the same period in 2018, was primarily the result of the following:

  • An increase in finance charges of 17.4% ($150.3 million) primarily due to growth in our loan portfolio.
  • An increase in interest expense of 27.0% ($30.9 million) due to increases in the average outstanding debt principal balance and our average cost of debt. The increase in the average outstanding debt principal balance was primarily due to borrowings used to fund the growth in our loan portfolio and stock repurchases. The increase in our average cost of debt was primarily the result of a change in the mix of our outstanding debt.
  • An increase in operating expenses of 13.4% ($29.0 million) primarily due to an increase in salaries and wages expense of 16.7% ($20.6 million) comprised of the following:
    • An increase of $13.3 million in cash-based incentive compensation expense primarily due to an improvement in Company performance measures.
    • Excluding the change in cash-based incentive compensation expense, salaries and wages expense increased $7.3 million, primarily related to our support function primarily as a result of an increase in the number of team members.
  • An increase in provision for income taxes of 11.0% ($14.5 million) due to an increase in pre-tax income of 15.6%, partially offset by a decrease in our effective tax rate from 23.8% in 2018 to 22.9% in 2019. The decrease in our effective tax rate is primarily due to an increase in tax benefits related to our stock-based compensation plan, which are recognized during the first quarter of each year.


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 “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, 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 nine months ended September 30, 2019, compared to the same periods in 2018, include the following:

  For the Three Months Ended September 30,   For the Nine Months Ended September 30,
(Dollars in millions, except per share data) 2019   2018   % Change   2019   2018   % Change
Adjusted average capital $ 6,506.6     $ 5,658.8     15.0 %   $ 6,274.9     $ 5,295.5     18.5 %
Adjusted net income $ 168.4     $ 147.2     14.4 %   $ 484.9     $ 401.5     20.8 %
Adjusted interest expense (after-tax) $ 39.5     $ 32.3     22.3 %   $ 113.7     $ 89.9     26.5 %
Adjusted net income plus interest expense (after-tax) $ 207.9     $ 179.5     15.8 %   $ 598.6     $ 491.4     21.8 %
Adjusted return on capital 12.8 %   12.7 %   0.8 %   12.7 %   12.4 %   2.4 %
Cost of capital 5.8 %   6.2 %   -6.5 %   6.0 %   6.2 %   -3.2 %
Economic profit $ 113.2     $ 91.5     23.7 %   $ 315.8     $ 247.0     27.9 %
Diluted weighted average shares outstanding 18,950,866   19,473,978   -2.7 %   18,967,552   19,472,197   -2.6 %
Adjusted net income per diluted share $ 8.89     $ 7.56     17.6 %   $ 25.56     $ 20.62     24.0 %

Economic profit increased 23.7% and 27.9% for the three and nine months ended September 30, 2019, as compared to the same periods in 2018.  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 and nine months ended September 30, 2019, as compared to the same periods in 2018:

  Year over Year Change in Economic Profit
(In millions) For the Three Months Ended September 30, 2019   For the Nine Months Ended September 30, 2019
Increase in adjusted average capital $ 13.9     $ 45.6  
Increase in adjusted return on capital 1.5     16.6  
Decrease in cost of capital 6.3     6.6  
Increase in economic profit $ 21.7     $ 68.8  

The increase in economic profit for the three months ended September 30, 2019, as compared to the same period in 2018, was primarily the result of the following:

  • An increase in our adjusted average capital of 15.0% primarily due to growth in our loan portfolio.
  • A decrease in our cost of capital of 40 basis points primarily due to a decrease in the 30-year Treasury rate, which is used in the average cost of equity calculation.

The increase in economic profit for the nine months ended September 30, 2019, as compared to the same period in 2018, was primarily the result of the following:

  • An increase in our adjusted average capital of 18.5% primarily due to growth in our loan portfolio.
  • An increase in our adjusted return on capital of 30 basis points primarily as a result of the following:
    • An increase in the yield on our loan portfolio increased the adjusted return on capital by 30 basis points primarily due to an improvement in Consumer Loan performance.
    • Slower growth in operating expenses increased the adjusted return on capital by 20 basis points as operating expenses grew by 13.4% while adjusted average capital grew by 18.5%.

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
    Sept. 30, 2019   Jun. 30, 2019   Mar. 31, 2019   Dec. 31, 2018   Sept. 30, 2018   Jun. 30, 2018   Mar. 31, 2018   Dec. 31, 2017  
Adjusted revenue as a percentage of adjusted average capital (1)   21.6 %   21.6 %   21.9 %   21.9 %   21.5 %   21.3 %   21.7 %   22.6 %  
Operating expenses as a percentage of adjusted average capital (1)   5.0 %   5.1 %   5.5 %   5.2 %   5.1 %   5.2 %   6.1 %   5.8 %  
Adjusted return on capital (1)   12.8 %   12.7 %   12.7 %   12.9 %   12.7 %   12.4 %   12.0 %   10.6 %  
Percentage change in adjusted average capital compared to the same period in the prior year   15.0 %   19.0 %   22.1 %   26.7 %   29.8 %   27.5 %   22.8 %   18.0 %  

(1)   Annualized.


The following tables provide a reconciliation of non-GAAP measures to GAAP measures.  Certain amounts do not recalculate due to rounding.

null
    For the Three Months Ended
(Dollars in millions, except per share data)   Sept. 30, 2019   Jun. 30, 2019   Mar. 31, 2019   Dec. 31, 2018   Sept. 30, 2018   Jun. 30, 2018   Mar. 31, 2018   Dec. 31, 2017
Adjusted net income                                
GAAP net income   $ 165.4     $ 164.4     $ 164.4     $ 151.9     $ 151.0     $ 151.0     $ 120.1     $ 177.1  
Floating yield adjustment (after-tax)   (14.5 )   (14.1 )   (15.8 )   (14.7 )   (15.8 )   (17.8 )   (19.9 )   (14.7 )
GAAP provision for credit losses (after-tax)   14.9     11.8     11.2     13.6     10.8     1.4     18.0     38.6  
Senior notes adjustment (after-tax)   (0.6 )   (0.7 )   (0.6 )   (0.6 )   (0.6 )   (0.7 )   (0.6 )   (0.5 )
Income tax adjustment (1)   3.2     1.5     (5.6 )   2.8     1.8     1.5     1.3     (100.0 )
Adjusted net income   $ 168.4     $ 162.9     $ 153.6     $ 153.0     $ 147.2     $ 135.4     $ 118.9     $ 100.5  
                                 
Adjusted net income per diluted share (2)   $ 8.89     $ 8.60     $ 8.08     $ 7.85     $ 7.56     $ 6.95     $ 6.11     $ 5.16  
Diluted weighted average shares outstanding   18,950,866   18,949,962   19,004,498   19,500,601   19,473,978   19,472,164   19,473,563   19,471,638
                                 
Adjusted revenue                                
GAAP total revenue   $ 378.7     $ 370.6     $ 353.8     $ 342.8     $ 332.0     $ 315.4     $ 295.6     $ 287.3  
Floating yield adjustment   (18.8 )   (18.4 )   (20.5 )   (19.0 )   (20.6 )   (23.0 )   (25.9 )   (23.4 )
GAAP provision for claims