Credit Acceptance Corporation

Good afternoon, everyone, and welcome to the Credit Acceptance Corporation's second quarter 2021 earnings call. Today's call is being recorded. A webcast and transcript of today's earnings call will be made available on Credit Acceptance's website. At this time, I'll now turn the call over to Credit Acceptance's Chief Treasury Officer, Doug Busk. Sir, you may now begin.

Thank you. Good afternoon and welcome to the Credit Acceptance Corporation's second quarter 2021 earnings call. As you read our news release posted on the investor relations section of our website at ir.creditexceptance.com, and as you listen to this conference call, please recognize that both contain forward-looking statements within the meaning of federal securities law. These forward-looking statements are subject to a number of risks and uncertainties many of which are beyond our control and which could cause actual results to differ materially from such statements. These risks and uncertainties include those spelled out in the cautionary statement regarding forward-looking information included in the news release. Consider all forward-looking statements in light of those and other risks and uncertainties. Additionally, I should mention that to comply with the SEC's Regulation G, please refer to the financial results section of our news release which provides tables showing how non-GAAP measures reconcile to GAAP measures. Our results for the quarter include unit and dollar volumes declined 28.7% and 20.5% respectively compared to the second quarter of 2020, an increase in forecasted collection rates for loans originated in 2017 through 2021. This resulted in a $104.5 million increase in the forecasted net cash flows from our loan portfolio. Adjusted net income, excluding a one-time reversal of stock compensation expense, increased 44% from the second quarter of 2020 to $221.4 million. Adjusted earnings per share, excluding a one-time reversal of stock compensation expense, increased 53% from the second quarter of 2020 to $13.18. Stacked for purchases of approximately 598,000 shares, 3.6% of the shares outstanding at the beginning of the quarter. At this time, Ken Booth, our Chief Executive Officer, Jay Martin, our Senior Vice President of Finance and Accounting, and I will take your questions.

Participants will now begin the question and answer session. To ask a question over the phone, you may press the star key followed by the number one. To withdraw your request, you may press the pound key. Again, that's star one to ask a question or the pound key to withdraw your request. First question is from the line of Mosh Orenbuck from Credit Suisse. Your line is now open.

Thanks. Doug, if possible, could you talk a little bit about the $104 million that you said in terms of expected higher collections, and just talk us through how that flows through both on a gap and an adjusted basis. Thanks. Mm-hmm.

Yeah, I mean, the 104 million was driven by an improvement in the forecasted collection rates on loans originated in recent years. You know, for adjusted accounting purposes, that improvement will be reflected as a yield on the portfolio that will be taken into our financial results on a level yield basis over time. For GAAP, the improvement in forecasted cash flows flows through the provision as a reversal of the provision and adjust the allowance to the point where the net carrying value of the loan asset would equal the present value of the forecasted net cash flows.

Got it. Thanks. And, I mean, I saw it's not on your website yet, but I did see on the SEC's website that you filed a 10-Q, so I'm just opening it as we speak. So is there, you know, kind of any update from the standpoint of the litigation with Massachusetts for the CFPB that we should be aware of?

You know, we're not really. You know, we have a little bit of updated disclosure in the 10-Q. relative to Massachusetts particularly. We're continuing to work toward finalizing an agreement with the Commonwealth that is consistent with the tentative agreement we came to back in April.

In the time frame, I guess it's been just over three months, right? That's kind of on the longer end for one of these. I mean, is there anything that we should, you know, kind of, you know, in terms of that process, you know, The only things I guess we know about it is that, you know, you agreed to pay them $27 million. Is there anything else that we should be aware of?

I mean, we can't really say, you know, anything other than what we've already, you know, disclosed. We're, you know, continuing to work with the Commonwealth or, as I said, you know, toward an agreement that's consistent with the understanding we reached in April. You know, beyond that, we can't really say anything.

And the... says there's a subsequent CID from the CFPB in June. You know, you had had, this has been kind of ongoing for, you know, a period of time. Anything different in what they're asking for that, you know, that we should know that?

You know, can't really comment beyond what's in the 10Q. Got it.

Okay.

Okay. All right. Thank you. Thanks, Moshe.

Next question is from the line of Ray Cheeseman of Anfield's Capital. Your line is now open.

Thank you. Doug, I wanted to ask you guys, with COVID cranking back up again and being very topical, And, of course, later this week, unless something changes, the eviction and foreclosure moratorium is kind of running out. Is it your expectation that just like the last two times, you know, kind of early in the pandemic and then kind of over that kind of extended Christmas quiet period, do you think there's a risk of another quiet period if the customer base is impacted by either fear of the disease or fear of making rent payments?

When you're referring to a quiet period, what specifically are you referring to? I'm saying the decline in business that occurred over the winter. Certainly possible. I don't think many things in this pandemic have played out as anyone would have thought. I think there's uncertainty into how things will progress from here. You know, anything's possible.

Second question would be, I think that I've been watching the Mannheim get a little soft or possibly even roll over here. Does that mean your optimism for the future might go up if it doesn't cost an arm and a leg to get a used car in the future and maybe more people can afford one?

Yeah, I mean, I think that would be helpful. As we point out in our earnings release, you know, I think You know, used cars, prices being at elevated levels have presented challenges for our customer base, so that would likely be helpful.

Okay, and then just a last one. I mean, you and a lot of other financial institutions were beneficiaries of CECL reserve releases during this particular reporting period, and I'm wondering – is there a chance that there's more reserve releases this year to come, or do you guys feel like you've got your arms around the best information right here and now?

I mean, we adjust our forecasting collection rates every month, and that adjustment is based primarily on how the loans actually perform versus our expectations. You know, so if loan performance continues to exceed expectations, you know, which is far from certain, then there would be additional provision reversals. You know, and if loan performance, you know, declines, then the opposite will occur. That would be incremental provision. So it's just all a function of how the loans perform.

Okay. Thank you very much.

Again, participants, it's star one to ask a question or the pound key to draw your request. Next question is from the line of Rob Wildhack of Autonomous Research. Your line is now open.

Hi, guys. In the press release, you attributed the slowdown in this quarter's unit volumes to reduced inventories and higher used car prices. Inventories have been depressed, and used car prices have been elevated for some time now, though. So I'm wondering if there's anything else that might have contributed to the deceleration in this particular quarter.

You know, nothing in particular. I think that, you know, from our understanding, you know, both the used car prices, especially for our segment of the market, and inventory levels, you know, got incrementally worse, you know, during the quarter. So I think that was, as we say, the most significant contributing factor. You know, the other thing is, is I, you know, looking at the industry data, which we only have through May, it seems like we lost a bit of share in the quarter, so that would be a contributing factor as well.

Okay, do you have a hypothesis for why you might have lost share in the quarter?

You know, the most likely explanations would be I think that the inventory challenges have been more significant with independent dealers. As you know, we get the majority of our originations from independents. And then I think that there's probably some reluctance on behalf of dealers, given the scarcity of inventory, to finance a loan with credit acceptance, given that the upfront gross is less than it would be with one of their traditional lenders. So we've gotten feedback that some dealers, given the scarcity of inventory, are electing not to finance that consumer and waiting for a higher credit quality borrower to come on the lot.

Okay. Thanks. And I appreciate that you can't comment on the lawsuit in Massachusetts or the settlement there, but wondering if you could comment on your business in Massachusetts. Has there been any noticeable change in volumes or dealer relationships since you announced the preliminary settlement? Nothing significant. Okay. Thank you.

Next question is again from the line of Ray Cheeseman of Anfields Capital. Your line is now open.

I just had a quick follow-up. There is an awful lot of capital out there that is chasing loans, and often people are being a little bit crazy to get volume. And you mentioned market share a minute ago. I'm wondering if you're seeing any disruptive players coming disturbing the market where you service your customers.

Well, you're certainly right that the more capital that the industry has access to, the more competitive it tends to be. I don't really have any particular insight into the business practices of others in the industry, so I can't provide a good answer to your question right now.

But your market share, it's not because you feel like somebody is trying to dramatically undercut the kind of rational rate that should be charged for the risk that's assumed?

It's really hard to say. I mean, there's lots of participants in the market. You know, we price our business to try to maximize economic profit. We try to make an acceptable return on what we forecast collections for. So, Yeah, I guess we've kind of looked at it from our perspective. You know, we're disappointed that volume's down, but we view this kind of as a temporary situation. How long it lasts, we don't really know, but we think the market will stabilize at some point. We feel good about the business that we're writing. Thank you very much.

Again, participants, it's star one to ask a question or the pound key to withdraw your request. With no further questions in the queue, I'll now turn the conference back over to Mr. Busk for any additional or closing remarks.

We would like to thank everyone for their support and for joining us on our conference call today. If you have any additional follow-up questions, please direct them to our investor relations mailbox at ir.creditacceptance.com. We look forward to talking to you again next quarter. Thank you.

Once again, this does conclude today's conference. We thank you for your participation.