Good day, everyone. And welcome to the Credit Acceptance Corporation First Quarter 2023 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 would like to turn the call over to Credit Acceptance Chief Treasury Officer, Doug Busk..

Thank you. Good afternoon. And welcome to the Credit Acceptance Corporation first quarter 2023 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 laws.

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 GAAP and adjusted results for the quarter include forecasted profitability for consumer loan assignment for consumer loans assigned in 2020 through 2022 that was lower than our estimates at March 31, 2022, due to a decline in forecasted collection rates during the last three quarters of 2022 and slower net cash flow timing during the first quarter of 2023 primarily as a result of a decrease in consumer loan prepayments.

Stable forecasted collection rates during the first quarter of 2023 with forecasted net cash flows from our loan portfolio increasing by $9.4 million or 0.1%.

In comparison, our results for the first quarter of 2022 reflected elevated consumer loan performance that followed the distribution of federal stimulus payments and enhanced unemployment benefits. Growth in consumer loan assignment volume as unit and dollar volumes grew 22.8% and 18.6%, respectively, as compared to the first quarter of 2022.

The average balance of our loan portfolio on a GAAP and adjusted basis for the first quarter of 2023 increased 0.8% and 5.1%, respectively, as compared to the first quarter of 2022.

The average balance of our loan portfolio on a GAAP and adjusted basis for the first quarter of 2023 increased 1% and 1.3%, respectively, as compared to the fourth quarter of 2022.

The initial spread on consumer loans assigned in the first quarter of 2023 was 21%, compared to 19.4% on consumer loans assigned in the first quarter of 2022 and 20.9% on consumer loans assigned in the fourth quarter of 2022.

Growth in operating expenses of 14.4% as compared to the first quarter of 2022, primarily due to an increase in the number of team members in our engineering department, as we are investing in our business to enhance our product and transform our technology systems to be more dealer and customer focused.

Adjusted net income decreased 35.6% for the first quarter of 2022 to $127 million. Adjusted earnings per share decreased 29.4% from the first quarter of 2022 to $9.71. 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..

[Operator Instructions] Our first question comes from Moshe Orenbuch with Credit Suisse. Your line is open..

Great. Thanks. Doug, I was hoping you could just like kind of talk a little bit about, you talked about stable collections but slower net cash flows.

Just talk a little bit about what the two of those things -- what that means and how they affect the financials as we go forward?.

Well, the stable net cash flows all else equal should be....

I think you said slower net cash flows, right, and stable collections..

Stable forecasted collection rates, I am sorry..

Yeah..

The stable forecasted collection rates all else equal will cause the yield to be more stable than it would have been if the forecasted collection rates have gone up or down.

Obviously, what happens in future periods and the yield on new originations impact that as well, but it’s nice to have stable forecasted collection rates after we had the last three quarters of 2022 where we had modest declines in forecasted collection rates.

In terms of the slowing of the timing for the net cash flows, I mean, all else equal that causes a decline in the yield on our portfolio, because obviously, cash flow is coming in over a longer period of time mean less in current dollars than if they came in over a shorter period of time..

Got it.

And the -- and which of those impacts caused the $44 million provision for forecast changes?.

The slowdown in the cash flow timing..

Got it. Okay.

And when you talk about the initial spread on the loans acquired in the period, like, how do we think about that relative to changes in interest rates or how should we think about it?.

What we are trying to do when we price our loans is, we are trying to maximize the amount of economic profit, which is economic profit per loan times the number of loans originated.

Economic profit considers the relationship between what we paid for the loan and what we expected to collect, how those loans perform over time and the anticipated expenses over the life of the loan including interest expense. So if interest expense goes up and we want to earn the same return, we need to lower advance, assuming nothing else change.

So it’s a longwinded answer to your question, it’s an expense that needs to be factored into our pricing just like any other expense..

Got it. Okay. Thanks. I will get back in the queue..

Thank you. Our next question comes from Robert Wildhack with Autonomous Research. Your line is open..

Hi. Guys. I wanted to ask a question about unit originations. I think you would said back in January that they were or from mid-February maybe they were up 39% in Jan 2023 and I think they finished up in the high 20s this quarter, which implies a decent slowdown in February and March.

So just how much did unit origination growth slow in February and March and then what do you think is behind that slowdown?.

The growth rates by month in the quarter were 39% in January, 27% in February and 12% in March. I think a fair amount of the variability in growth rates during the quarter was primarily due to differences in the strength of prior year capitals. We had a bit of a soft January in 2022, February and March were certainly better.

So I think that prior year comps had a fair amount to do with it..

Okay. And then industry-wide, I think, things looked maybe the most stretched in 2021 and then maybe into early 2022.

So coming up on 18 months from that point and we see a lot of the headlines around delinquencies and losses in subprime auto broadly, to what degree do you think that your competitors and the industry have rationalized their underwriting?.

The industry is very fragmented. So I don’t have tremendous insight into how each industry participant is reacting to a more challenging credit environment. I can look at the industry statistics as published by Auto Count and see that more people appear to be tapping on the brakes that are pushing on the gas.

So that would lead me to believe that most at least of the top 20 industry participants are getting incrementally more conservative..

Okay. Thanks..

Thank you. Our next question comes from John Rowan with Janney. Your line is open..

Good afternoon, guys..

Hi, John..

Doug, you just gave a bunch of numbers regarding kind of the month-by-month. I think it was unit volume, correct? Was there any change in underwriting that, obviously, you mentioned the year-over-year comps and that’s fine, but you did have a relatively big decrease in the advance rate here for the quarter.

I am wondering if there was any coincidence with a change in the advance rate and also the slower number for March?.

We had a better number in April. I mean if you adjust for the number of days it was 18%. So April was better than March. I mean as you rightly point out, the advance rate was lower in Q4, and it was lower in Q1. In general, the less you pay the dealers of origination, the fewer loans you originate, so that likely had some impact on volume..

Okay. And then, obviously, the advance -- your initial advance rate for the year is 21%. It looks like it’s the highest number since 2016.

I am wondering if -- maybe it’s in the press release, haven’t gone through to yet, but is there an initial advance rate for April?.

No. There is at the release..

Okay.

And then just, lastly, any updates on the CFPB and New York AG issue?.

No. The latest and greatest is in the 10-Q that we filed today..

Okay.

So it was just -- from what was in there, it’s just a motion to dismiss the whole case, correct?.

Correct..

Okay. All right. Thank you..

Yeah..

Thank you. [Operator Instructions] Our next question comes from Ray Cheesman with Anfield Capital Management. Your line is open..

Doug, I am wondering, this is such a unique environment. It’s been many, many years since we had rising rates, rising inflation, credit standards tightening, lowered SNAP payments, lower tax refunds, school debt payments restarting.

How do you -- I mean how do you program that into a computer to protect you guys against people taking advantage of -- you have got capital, it’s very attractively priced. Congratulations on the warehouse extension the other day and you are a grower.

And so while maybe Citizens is letting theirs runoff and Capital One let theirs runoff, you guys are -- you are in the trenches, you are in there fighting.

But how do you take all that in and pick the good loans with the good payers on the good collateral versus everything else out there that clearly is piling up in some of the ABS numbers?.

Well, I mean, we have a pretty good track record at being able to satisfactory predict collection rates over a large number of loans. We don’t have the ability to predict individual outcomes. So differentiating which consumer is going to lose their job in 18 months or which one’s going to encounter medical bills or what have you.

But we have shown the ability to be predictive over a large number of loans. Having said that, there are a whole bunch of factors that are not certain at the time you are underwriting a loan aside from the things I just mentioned. Inflation, changes in unemployment rates, changes in car prices.

No one can accurately predict how those variables are going to behave over the terms of the 60-month auto loan.

So the primary way we deal with that uncertainty is we build a significant margin of safety into our loans at the time that we originate them, with the result being that even if loan performance is less than anticipated, it’s still highly likely our loans are going to produce satisfactory levels of profitability.

In addition, on the portfolio program, we are sharing the risk on the loan with the dealer. So if we collect $100 less on a loan, 80% of that is going to be borne by the dealer in the form of a reduction in dealer holdback. Now, obviously, that only works to a certain extent, but certainly, we have a layer of protection there that is helpful..

My other question was, how does all of that environmental stuff impact? I mean, as I said, you guys just extended your warehouse and that was wonderful to see. But how do you think it impacts the funding environment generally? I mean, we just had that another bank fall apart this morning and disappear.

Are you seeing your funding environment change, is it competitor’s environments changing, and traditionally, during less terrific times for people’s credit availability, you tend to do better.

So is that kind of the outlook that you still have going forward?.

I think that remains to be seen. I mean I think the fact that we have shown some better growth numbers in recent periods indicates that the market has gotten a bit better for us. I do think that the debt markets have reacted to some of the concerns around credit quality, some banks are tightening credit, credit spreads are wider across the Board.

So I think that the capital markets have reacted to it. It hasn’t impacted us yet, and hopefully, it doesn’t. But I think the credit markets are certainly tighter and more expensive now than they were, say, a year or 18 months ago..

Okay. Thank you very much for your thoughts. I though you guys are hanging in there really very well. So thanks..

Thank you. Our next question is a follow-up from Moshe Orenbuch with Credit Suisse. Your line is open..

Doug, just two quick things. The first is, you mentioned that, GAAP and adjusted kind of assets were growing in the 1% to mid-1%s.

Given what you are seeing in terms of originations and the pace of originations, that deceleration you talked about that went into April? And cash flows, if you kind of put the two of them together, do you think that, that numbers kind of accelerating or decelerating into Q2 the growth in loans?.

I mean, I think, a lot of that, I think, we are -- based on April numbers, we should still be growing the portfolio, but that could turn around May or June. So I think the growth in the portfolio primarily, I think, is just a function of what sort of growth we put out from this point forward..

Got you. And then just a quick modeling one, salaries and wages, I think, were high, I didn’t get a chance to look in the Q.

Was there anything in there that we should think of as onetime or is that the run rate?.

All right. Well, if you are comparing Q1 to Q4, there are certain expenses, like, payroll taxes and fringe benefits that tend to be higher in Q1 and most of the increase versus Q4 was due to seasonal impacts, increase in sales commissions would be another one.

If you are comparing it to Q1 of last year, obviously, have comparable seasonal factors today, but the thing that accounts for the difference in operating expenses in Q1 this year versus Q1 last year is an increase in engineering expense that is likely to continue. So really….

Excellent..

… it depends on what your starting point is, Moshe..

Okay. All right. Thanks very much..

Thank you. Our next question is a follow-up from Robert Wildhack with Autonomous Research. Your line is open..

Hi, Doug. Thanks for the follow. I just wanted to ask about the repurchase. I think in the past you have talked about when you are growing originations, you won’t repurchase as much and vice versa.

So just curious what the appetite for share repurchases is given the growth is a little bit slower now than it was towards the end of last year?.

I think we continue to think about it the same way we always have.

The first priority is to make sure we have the capital we need to fund anticipated levels of loan originations and that obviously includes a number of subjective considerations, like, what the capital markets are, like, what sort of bank tightening is going on, regulatory matters, et cetera.

But if we are comfortable with what we have all the capital we need to fund and anticipate the levels of originations then we go to the next step and if we can buy the stock for less than we think it’s worth, we do so. So we are thinking about it the same way we have for many, many years..

Thank you. With no further questions in the queue, I would like to turn the conference back over to Mr. Busk for any additional or closing remarks..

We 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 are looking forward to talking to you again next quarter. Thank you..