Credit Acceptance Corp

NASDAQ:CACC

Earnings Call Transcript 2021-Q3

[Operator]

Good day everyone and welcome to the Credit Acceptance Corporation third 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 website.

At this time, I will now turn the call over to Credit Acceptance's Chief Treasury Officer, Doug Busk. Sir, you may now begin.

[Doug Busk, Chief Treasury Officer,]

Thank you. Good afternoon and welcome to the Credit Acceptance Corporation third quarter 2021 earnings call. As you read our news release posted on the Investor Relations section of our website at ir.creditacceptance.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 29.4% and 17.9%, respectively compared to the third quarter of 2020 and increase in forecasted collection rates for loans originated in 2017 through 2021. This resulted in a $82.3 million increase in the forecasted net cash flows from our loan portfolio.

Adjusted net income increased 31% from the third quarter of 2020 to $219.1 million. Adjusted earnings per share increased 48% from the third quarter of 2020 to $13.84. Stock repurchases of approximately 1.3 million, 8%,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, Finance and Accounting and I, will take your questions.

[Operator]

[Operator Instructions]. Your last year first question comes from the line of David Scharf from JMP Securities. Your line is now open.

[David Scharf, JMP Securities]

Hi. Good afternoon. Thanks for taking my questions. I guess first off, obviously the entire industry is struggling with the unique inventory issues and elevated used car values, affordability issues, so no surprise on the volume front. But I am wondering, if you can give a little color perhaps on your take on the health of the independent dealer network? And in particular as we look at the decline in active dealers, once again obviously reflecting industry forces, but is that decline entirely related to just the volume and affordability issues? Or is there any attrition taking place among independent dealers that that you are seeing right now?

[Doug Busk, Chief Treasury Officer,]

I don't think that we have any real unique insight there. Independent dealers come into business and go out of business all the time. I think the best way to all understand what's happening from an attrition perspective would be to look at some industry data. The problem with that is that that's available on a lagged basis. So will be able to understand that better with the passage of time. But right now, I am sure it's a challenging time to be an independent dealer. But exactly how they are faring and what levels of attrition there are, I think it's difficult to say.

[David Scharf, JMP Securities]

Got it. Okay. And maybe just one follow-up. Once again, maybe it's more of a qualitative question without a crystal ball. But obviously, the rising used car values certainly impacts your borrower probably the most. And just looking at the average loan size in this past quarter, almost $27,000, it about 10% above what it was just in the first half of the year. As you think about just the affordability aspects of your borrower and obviously stimulus wearing off and other areas of support, do you feel like we have kind of reached a ceiling where it's going to be pretty difficult to put somebody in a vehicle where they would be able to be comfortable with their monthly payments beyond this $27,000 level? Or do you think there is room to go?

[Doug Busk, Chief Treasury Officer,]

I think it's, again, tough to tell. We certainly have payment to income criteria that we use when we underwrite the loans, as the industry does. As you point out, certainly, elevated used car prices have made it increasingly challenging for our borrower. I think it's fair to say that further increases in used car prices will make it incrementally more challenging. But I think it's very difficult to say is this is the limit. I think it's fair to say, the higher prices go, it makes it more incrementally challenging. So I think there would be some relief for our borrower if used car prices went the other way, fair to say that. But I can't say, I don't think there is a cliff phenomenon that occurs.

[David Scharf, JMP Securities]

Got it. Fair enough. I mean obviously a lot of unprecedented events we are all living through right now. Great. Well, thank you very much.

[Doug Busk, Chief Treasury Officer,]

You bet.

[Operator]

Your net question comes from the line of Moshe Orenbuch from Credit Suisse. Your line is now open.

[Moshe Orenbuch, Credit Suisse]

Great. Maybe to follow-up on that. I think you kind of alluded to some of the steps you are taking to underwrite a nameboard in a higher used car price environment. Any other steps that you are taking in terms of things that you are putting in place?

[Doug Busk, Chief Treasury Officer,]

We haven't made material changes to our underwriting process.

[Moshe Orenbuch, Credit Suisse]

Got it. Okay. I did notice that the yield or adjusted rate. I should say, has gone up the last couple of quarters and I think in the footnotes it talks about that being assumption of the strong collections at 24%. Is that a number that we would expect to persistence? Is there any way to put some parameters around that?

[Doug Busk, Chief Treasury Officer,]

I mean I think it's hard to tell if it's going to persist or not. It really depends on how long the elevated collections remain. But it's hard to predict how long that will go on. But collections are real strong for us. As long as they continue, we will see pretty high adjusted revenue.

[Moshe Orenbuch, Credit Suisse]

Got it. And the release notes, stock options expense, is that going to be a regular quarterly amount? How should we think about that, $14.7 million?

[Doug Busk, Chief Treasury Officer,]

Yes. If you think about that expense, we didn't begin recognizing that until we received shareholder approval in July. So we received approval July 21. So if you look at that number, that was about 70 days worth of expense for the third quarter. You can project that out and then that will be what it is for the fourth quarter. One thing I would point out there is that the first annual vesting installment of these stock options, we granted them first back in last December, it's going to be compressed in this first annual period since we didn't begin expense recognition until we received shareholder approval, where in the future years, that will be spread out more throughout the year.

[Moshe Orenbuch, Credit Suisse]

I see. So is that a calendar year? So as you say, Q3 and Q4 will be the amount that we would expect to see for the full year 2022?

[Doug Busk, Chief Treasury Officer,]

I think it depends because if you look at when the options were granted, the majority of them are granted last December. There was another large grant in April. So it won't exactly be that amount going forward.

[Moshe Orenbuch, Credit Suisse]

Okay. We will take it offline. We will figure it out. I did notice obviously a very large repurchase amount in 2020 in the quarter. It looks like you bought back through October 25, based on the front of queue maybe another 200,000 shares. How should we be thinking about that pace of repurchase like given that volumes still looked light in October? So how should we thinking about that?

[Doug Busk, Chief Treasury Officer,]

I think we are really just going to follow our standard approach to that. When we excess capital, first, we look to have it invested in the business. If we have got opportunities to invest in the business, that's what we do. Right now obviously originations have been challenging. We have got adequate capital. So at that point, we return to shareholders. So I would consider, we would expected to continue for a while.

[Moshe Orenbuch, Credit Suisse]

Excellent.

[Doug Busk, Chief Treasury Officer,]

Hi Moshe.

[Moshe Orenbuch, Credit Suisse]

Yes.

[Doug Busk, Chief Treasury Officer,]

Relative to your question about stock option expense, there is a table on page 41 of the Q that shows the expected amount of expense for the remainder of the year and subsequent years.

[Moshe Orenbuch, Credit Suisse]

Okay. I haven't gotten to it yet. Thanks a lot.

[Doug Busk, Chief Treasury Officer,]

You bet.

[Operator]

Your next question comes from the line of Ray Cheesman from Anfield Capital. Your line is now open.

[Ray Cheesman, Anfield Capital]

Thank you for taking my questions. I had two today. Most of the big banks that have outstanding consumer exposure are also reporting terrific credit quality and also they warned us that over the next two to four quarters they expect things to more normalize with the fall off of various government support projects where they are turning back on if other loan streams like student loans went away first. As you kind of gut check 2022, would you expect anything different to happen in your business or basically the same kind of go back to the old rates?

[Doug Busk, Chief Treasury Officer,]

I mean, we don't have a crystal ball. So we don't know what's going to happen. But collections have been very strong, as you have seen in our last couple of releases. It does not really seem logical that those will continue forever. When they falloff, I think it's hard to predict. But I would expect at some point collections to go back to more normal levels.

[Ray Cheesman, Anfield Capital]

The other question I had was the shift in the portfolio toward increased dealer loans versus purchase loans, do you feel like that changes the risk profile of the portfolio?

[Doug Busk, Chief Treasury Officer,]

Yes. Certainly, I think it changes it to a degree, because on the portfolio program you know we are sharing the risk on the loan with the dealer. So any shortfall in collections is substantially offset by a reduction in dealer holdback. The change in the percentage of the portfolio was relatively modest. So there hasn't been a significant derisking of the portfolio. But there is a reduction on the margin.

[Ray Cheesman, Anfield Capital]

And if I may, just one more quickly. You said that you hadn't changed your underwriting standards. I am wondering if the fall off in new assignments, because look I will be honest I am looking for a car and they tell me I have to fly to Texas to get one and I live in Colorado. The question is, do you guys ever play with and I shouldn't use that term, we call it a technical term play, the value in order to generate some volume, you might adjust your pricing because of the support in the used car market to kind of moderate that risk in the next one, two, three years?

[Doug Busk, Chief Treasury Officer,]

We are always running various champion challenges that kind of maximize our economic profit originated. So we do run various scenarios and we attempt to price it appropriately. But we are not chasing volume, for example or we are not hedging against something we can't predict in the future.

[Ray Cheesman, Anfield Capital]

Thank you.

[Operator]

[Operator Instructions]. Your next question comes from the line of Rob Wildhack. Your line is now open.

[Rob Wildhack, Autonomous Research]

Hi guys. A more broader or strategic question. How do you think about the appropriate leverage level for running the business?

[Doug Busk, Chief Treasury Officer,]

What we are trying to do with the way we finance the business is make sure it produces a cost-effective result when the capital markets are wide open, but also allows us to maintain level amount of originations if the capital markets were closed for an extended period of time. So that has really driven the way we have run the liability side of the balance sheet, operating with modest leverage and significant excess availability on the revolver. So it's kind of an output of an analysis that we do.

[Rob Wildhack, Autonomous Research]

Okay. Would you say that the degree of levers you have today, that will be characterized as modest and meet all those security estimates and excess availability?

[Doug Busk, Chief Treasury Officer,]

Yes.

[Rob Wildhack, Autonomous Research]

Okay. Thanks.

[Operator]

With questions in the queue, I would like to turn the conference back over to Mr. Busk for any additional or closing remarks.

[Doug Busk, Chief Treasury Officer,]

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 [e-mail]. We look forward to talking to you again next quarter. Thank you.

[Operator]

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