Credit Acceptance Corporation (NASDAQ:CACC) Q3 2023 Earnings Conference Call October 30, 2023 5:00 PM ET Company Participants Douglas Busk - Chief Treasury Officer Conference Call Participants John Rowan - Janney Montgomery Scott John Hecht - Jefferies Robert Wildhack - Autonomous Research Operator Good day, everyone and welcome to the Credit Acceptance Corporation Third Quarter 2023 Earnings Call. Today's call is being recorded. A webcast and transcript of today's earnings call will be made available on Cr ...

(1) Measured at amortized cost with fair value disclosed. (2) Measured at fair value on a recurring basis. Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED) (UNAUDITED) 5. RESTRICTED SECURITIES AVAILABLE FOR SALE | --- | --- | --- | --- | --- | --- | --- | --- | --- | |------------------------------------------------------------------------------|------------------------|---------------------|-------|----------------------|---------------------------|-------------------------------- ...

Credit Acceptance Corporation (NASDAQ:CACC) Q2 2023 Earnings Conference Call August 1, 2023 5:00 PM ET Company Participants Doug Busk - Chief Treasury Officer Ken Booth - CEO Jay Martin - SVP, Finance and Accounting Conference Call Participants Arjun Tuteja - Jarislowsky Fraser John Rowan - Janney Montgomery Scott Robert Wildhack - Autonomous Research Vincent Caintic - Stephens Ray Cheesman - Anfield Capital Management Operator Good day, everyone, and welcome to the Credit Acceptance Corporation's Second Qu ...

CREDIT ACCEPTANCE CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) | --- | --- | --- | --- | --- | --- | --- | --- | --- | |----------------------------------------------------------------|-------|------------------------------------------|--------------------|------------------------|-------|-----------------------------------------|--------------------|----------------------| | (In millions) \nNet income | $ | For the Three June \n2023 \n22.2 | Months 30, \n$ | Ended \n2022 \n107.4 ...

Financial Data and Key Metrics Changes - Adjusted net income decreased by 35.6% to $127 million for Q1 2023 compared to Q1 2022 [13] - Adjusted earnings per share decreased by 29.4% to $9.71 from Q1 2022 [13] - The average balance of the loan portfolio increased by 0.8% on a GAAP basis and 5.1% on an adjusted basis compared to Q1 2022 [12] - Forecasted net cash flows from the loan portfolio increased by $9.4 million or 0.1% in Q1 2023 [4] Business Line Data and Key Metrics Changes - Growth in consumer loan assignment volume increased by 22.8% in units and 18.6% in dollar volumes compared to Q1 2022 [18] - The initial spread on consumer loans assigned in Q1 2023 was 21%, up from 19.4% in Q1 2022 [5] Market Data and Key Metrics Changes - The company noted stable forecasted collection rates during Q1 2023, contrasting with the elevated consumer loan performance seen in Q1 2022 due to federal stimulus payments [4] Company Strategy and Development Direction - The company is investing in its engineering department to enhance products and transform technology systems to be more dealer and customer-focused, leading to a 14.4% increase in operating expenses compared to Q1 2022 [19] - The company aims to maintain capital to fund anticipated levels of loan originations while considering market conditions and regulatory matters [49] Management's Comments on Operating Environment and Future Outlook - Management indicated that the debt markets have reacted to concerns around credit quality, with tighter and more expensive credit markets compared to 18 months ago [45] - The company expects to continue growing its portfolio based on April numbers, although this could change in the coming months [24] Other Important Information - The company reported a provision for forecast changes of $44 million, primarily due to the slowdown in cash flow timing [60] - Management emphasized the importance of building a significant margin of safety into loans to mitigate uncertainties in the underwriting process [41] Q&A Session Summary Question: How do you program the unique environment with rising rates and inflation? - Management stated they have a good track record in predicting collection rates over a large number of loans but cannot predict individual outcomes [23] Question: How does the funding environment change with recent bank failures? - Management noted that while the funding environment remains stable for them, credit markets are tighter and more expensive than before [45] Question: What is the appetite for share repurchases given slower growth? - Management indicated that share repurchases are considered when they can buy stock for less than its worth, depending on capital availability [54] Question: What were the growth rates for unit originations in Q1? - Management reported growth rates of 39% in January, 27% in February, and 12% in March, attributing variability to prior year comparisons [68] Question: Any updates on the CFPB and New York AG issue? - Management stated that the latest updates are included in the 10-Q filed on the same day [52]

The following table compares our forecast of Consumer Loan collection rates as of March 31, 2023 with the forecasts at the time of assignment, for Dealer Loans and Purchased Loans separately: | --- | --- | --- | --- | --- | --- | --- | |-------------------------------------|-------------------------------------------------------|---------------------------------------------------------|----------|--------------------------------------------------|------------------------------------------------------------- ...

PART I [Business](index=3&type=section&id=Item%201.%20Business) The company provides indirect auto financing to consumers with limited credit history through a nationwide dealer network [Principal Business and Programs](index=4&type=section&id=Principal%20Business%20and%20Programs) The company operates two main financing programs for dealers, with the Portfolio Program representing the majority of volume - The company offers two financing programs for auto dealers: the Portfolio Program (advances to dealers) and the Purchase Program (outright purchase of consumer loans)[277](index=277&type=chunk) Consumer Loan Assignment Volume by FICO Score | Year | % of total unit volume with FICO scores below 650 or no FICO scores | | :--- | :--- | | 2022 | 84.8% | | 2021 | 91.0% | | 2020 | 94.9% | Financing Program Mix by Volume (2020-2022) | Year | Program | Unit Volume % | Dollar Volume % | | :--- | :--- | :--- | :--- | | 2022 | Portfolio Program | 73.5% | 69.8% | | | Purchase Program | 26.5% | 30.2% | | 2021 | Portfolio Program | 67.9% | 65.0% | | | Purchase Program | 32.1% | 35.0% | | 2020 | Portfolio Program | 64.1% | 60.6% | | | Purchase Program | 35.9% | 39.4% | [Operations and Revenue](index=6&type=section&id=Operations%20and%20Revenue) Revenue is primarily driven by finance charges, and operations rely on a proprietary system to manage loan processing and risk Revenue Sources as a Percentage of Total Revenue | Source | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Finance charges | 92.0% | 93.9% | 93.6% | | Premiums earned | 3.4% | 3.2% | 3.4% | | Other income | 4.6% | 2.9% | 3.0% | Dealer Network Statistics (2020-2022) | Year | Dealer Enrollments | Active Dealers | | :--- | :--- | :--- | | 2022 | 3,627 | 11,901 | | 2021 | 2,804 | 11,410 | | 2020 | 3,413 | 12,690 | - All consumer loans are processed through the company's internet-based Credit Approval Processing System (CAPS), which utilizes a proprietary credit scoring system to determine funding amounts based on expected collection rates[310](index=310&type=chunk) [Geographic Concentration and Competition](index=10&type=section&id=Geographic%20Concentration%20and%20Competition) The company operates in a highly competitive market with a notable concentration of loan volume in five key states - The company competes in a large and highly competitive market against banks, captive finance companies, credit unions, and independent finance companies[320](index=320&type=chunk)[348](index=348&type=chunk) Top 5 States by Consumer Loan Dollar Volume (2022) | State | Dollar Volume ($M) | % of Total | | :--- | :--- | :--- | | Michigan | $353.0 | 9.7% | | New York | $229.8 | 6.3% | | Ohio | $205.7 | 5.7% | | Texas | $205.5 | 5.7% | | New Jersey | $204.0 | 5.6% | | **Total Top 5** | **$1,198.0** | **33.0%** | [Regulation and Legal Matters](index=12&type=section&id=Regulation%20and%20Legal%20Matters) The company is subject to extensive regulation and is currently involved in several significant regulatory investigations - The business is subject to numerous laws and regulations, including the Truth in Lending Act, Equal Credit Opportunity Act, and prohibitions against unfair, deceptive, and abusive acts and practices (UDAAP)[323](index=323&type=chunk) - On January 4, 2023, the Office of the New York State Attorney General and the CFPB jointly filed a complaint against the company alleging **deceptive and abusive practices**[4](index=4&type=chunk)[386](index=386&type=chunk) - The company is also involved in ongoing regulatory inquiries from the U.S. Department of Justice (since 2014), the California Attorney General (regarding GAP products), and a multi-state investigation led by the Maryland Attorney General[5](index=5&type=chunk)[353](index=353&type=chunk)[354](index=354&type=chunk) [Human Capital](index=15&type=section&id=Human%20Capital) The company employs over 2,200 team members and has adopted a "remote first" work strategy - The company employed **2,246 team members** as of year-end 2022, an increase from 2,073 in 2021[8](index=8&type=chunk)[357](index=357&type=chunk) - The company has adopted a **"remote first" strategy**, with the vast majority of its team members working remotely from locations across the United States[33](index=33&type=chunk)[329](index=329&type=chunk) [Risk Factors](index=15&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks from its subprime lending model, competition, debt covenants, and regulatory scrutiny [Industry, Operational and Macroeconomic Risks](index=16&type=section&id=Industry%2C%20Operational%20and%20Macroeconomic%20Risks) Key risks include inaccurate loan collection forecasting, intense competition, and sensitivity to economic downturns - The inability to accurately forecast the amount and timing of future collections on subprime auto loans is a **critical risk** that could materially affect results of operations[359](index=359&type=chunk)[392](index=392&type=chunk) - The company faces **intense competition** from traditional and non-traditional lenders, which may impact its ability to acquire consumer loans at desired volumes and terms[10](index=10&type=chunk)[393](index=393&type=chunk) - **Adverse economic conditions**, such as a recession, inflation, or high unemployment, could increase loan defaults and losses, particularly given the focus on the non-prime consumer market[17](index=17&type=chunk)[400](index=400&type=chunk) [Capital and Liquidity Risks](index=20&type=section&id=Capital%20and%20Liquidity%20Risks) Substantial debt exposes the company to financing, interest rate, and restrictive covenant risks - The company's **substantial debt** could negatively impact the business, with a significant portion of cash flow dedicated to debt service[24](index=24&type=chunk)[407](index=407&type=chunk) - Debt agreements contain **restrictive covenants** that limit the company's ability to incur more debt, pay dividends, make acquisitions, and sell assets[22](index=22&type=chunk)[172](index=172&type=chunk)[405](index=405&type=chunk) - Fluctuations in interest rates may adversely affect borrowing costs, as some debt facilities have variable rates[140](index=140&type=chunk)[408](index=408&type=chunk)[439](index=439&type=chunk) [Technology and Cybersecurity Risks](index=23&type=section&id=Technology%20and%20Cybersecurity%20Risks) The business is highly dependent on its technology platforms and faces significant risks from system interruptions and cyber attacks - The business relies heavily on its internet-based CAPS application for loan origination and a technology-based platform for servicing, making it **vulnerable to system interruptions**[28](index=28&type=chunk) - The company collects and stores sensitive consumer and employee data, making it a target for cyber attacks[30](index=30&type=chunk)[60](index=60&type=chunk)[141](index=141&type=chunk) - The use of electronic contracts for loan assignments introduces a risk that the company's ownership or security interest may not be legally perfected[29](index=29&type=chunk)[411](index=411&type=chunk) [Legal and Regulatory Risks](index=24&type=section&id=Legal%20and%20Regulatory%20Risks) The company faces risks from ongoing litigation, regulatory investigations, and potential changes in tax laws - The company is subject to various consumer claims, litigation, and regulatory investigations that could result in **substantial damages, fines, and penalties**[380](index=380&type=chunk)[412](index=412&type=chunk) - Changes in statutory income tax rates or adverse outcomes related to uncertain tax positions could have a **material adverse effect** on results of operations and cash flows[62](index=62&type=chunk)[413](index=413&type=chunk) [Properties](index=24&type=section&id=Item%202.%20Properties) The company owns two office buildings but has significant excess space, creating a risk of a material impairment charge - The company owns two office buildings in Southfield, Michigan, with a combined carrying value of **$38.2 million** for buildings, land, and equipment[174](index=174&type=chunk)[444](index=444&type=chunk) - A "remote first" strategy has resulted in significant excess office space, and the company is considering selling or leasing one or both buildings[33](index=33&type=chunk)[174](index=174&type=chunk) - Management believes the market value of its office properties is **significantly less than their carrying value**, which could result in a material impairment charge if they are reclassified as held for sale[174](index=174&type=chunk) [Legal Proceedings](index=24&type=section&id=Item%203.%20Legal%20Proceedings) Significant litigation details are incorporated by reference from the notes to the consolidated financial statements - For a description of significant litigation to which the company is a party, refer to Note 16 to the consolidated financial statements[31](index=31&type=chunk)[445](index=445&type=chunk) [Mine Safety Disclosures](index=24&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company's business - Not applicable[416](index=416&type=chunk) PART II [Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities](index=25&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity%2C%20Related%20Stockholder%20Matters%2C%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's stock trades on Nasdaq (CACC), and it actively repurchases shares under a board-authorized program - The company's common stock is traded on The Nasdaq Global Select Market under the symbol "CACC"[35](index=35&type=chunk)[417](index=417&type=chunk) Stock Repurchases for Q4 2022 | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Oct 1 - Oct 31, 2022 | — | $ — | | Nov 1 - Nov 30, 2022 | — | $ — | | Dec 1 - Dec 31, 2022 | 207,769 | $455.68 | | **Total** | **207,769** | **$455.68** | - Repurchases are conducted under the September 2021 Authorization, which allows for the repurchase of up to two million shares and has no specified expiration date[420](index=420&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=27&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Net income decreased significantly in 2022 due to a higher provision for credit losses from declining loan performance [Overview](index=28&type=section&id=Overview) Net income fell sharply in 2022, driven by a large increase in the provision for credit losses despite loan volume growth Key Financial Results (2022 vs. 2021) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net Income | $535.8M | $958.3M | | Diluted EPS | $39.32 | $59.52 | - Key operational highlights for 2022 included a decrease in forecasted collection rates, an increase in consumer loan assignment volume, and the repurchase of **10.4% of shares outstanding**[40](index=40&type=chunk) [Consumer Loan Metrics](index=29&type=section&id=Consumer%20Loan%20Metrics) Forecasted collection rates for recent loan vintages declined in 2022, while overall loan volume increased Forecasted Collection Rates by Assignment Year | Assignment Year | Dec 31, 2022 Forecast | Initial Forecast | Variance from Initial | | :--- | :--- | :--- | :--- | | 2018 | 65.2% | 63.6% | +1.6% | | 2019 | 66.6% | 64.0% | +2.6% | | 2020 | 67.8% | 63.4% | +4.4% | | 2021 | 66.2% | 66.3% | -0.1% | | 2022 | 66.3% | 67.5% | -1.2% | Change in Forecasted Net Cash Flows (in millions) | Year | Dealer Loans | Purchased Loans | Total | | :--- | :--- | :--- | :--- | | 2022 | $(41.6) | $(18.1) | $(59.7) | | 2021 | $87.7 | $238.4 | $326.1 | | 2020 | $(41.1) | $(5.2) | $(46.3) | Consumer Loan Volume Changes (YoY) | Metric | 2022 vs 2021 | 2021 vs 2020 | | :--- | :--- | :--- | | Unit Volume | +4.4% | -21.4% | | Dollar Volume | +14.5% | -13.0% | | Active Dealers | +4.3% | -10.1% | [Results of Operations (2022 vs. 2021)](index=35&type=section&id=Results%20of%20Operations%20(2022%20vs.%202021)) A surge in the provision for credit losses drove a significant increase in expenses and a sharp decline in pre-tax income - Finance charges decreased by **$56.3 million (3.2%)** due to a lower average net loans receivable balance[438](index=438&type=chunk)[466](index=466&type=chunk) - Provision for credit losses increased by **$473.0 million**, primarily due to a $494.4 million negative swing in forecast changes, reflecting deteriorating loan performance[86](index=86&type=chunk)[114](index=114&type=chunk)[146](index=146&type=chunk) - Operating expenses increased by **$42.6 million (11.1%)**, mainly driven by a $43.9 million rise in salaries and wages[467](index=467&type=chunk) - Other income increased by **$30.3 million (57.1%)**, primarily due to a $20.4 million increase in ancillary product profit sharing income[85](index=85&type=chunk) [Critical Accounting Estimates](index=37&type=section&id=Critical%20Accounting%20Estimates) The allowance for credit losses is the most significant estimate, relying on complex models to forecast future cash flows - The estimation of the amount and timing of future collections and Dealer Holdback payments is a **critical accounting estimate** impacting multiple financial statement line items[88](index=88&type=chunk)[470](index=470&type=chunk) - In Q1 2022, the company removed its COVID-19 forecast adjustment and enhanced its forecasting methodology, which **reduced the provision for credit losses by $70.6 million**[90](index=90&type=chunk)[117](index=117&type=chunk)[472](index=472&type=chunk) - A **1% decline** in forecasted future net cash flows on loans as of December 31, 2022, would have reduced 2022 consolidated net income by approximately **$45.9 million**[502](index=502&type=chunk) [Liquidity and Capital Resources](index=40&type=section&id=Liquidity%20and%20Capital%20Resources) The company funds its business through operating cash flows and various debt instruments, maintaining ample liquidity - Primary sources of capital are cash flows from operations and borrowings under a revolving secured line of credit, Warehouse facilities, Term ABS financings, and senior notes[122](index=122&type=chunk) - During 2022, the company completed new Term ABS financings totaling over **$900 million** and extended several other credit facilities[95](index=95&type=chunk)[506](index=506&type=chunk)[507](index=507&type=chunk) Material Financial Obligations as of Dec 31, 2022 (in millions) | Obligation | In less than 12 months | In 12 months or more | Total | | :--- | :--- | :--- | :--- | | Long-term debt | $1,507.9 | $3,108.6 | $4,616.5 | | Dealer Holdback | $215.7 | $741.5 | $957.2 | | Operating lease obligations | $0.7 | $0.7 | $1.4 | | Purchase obligations | $2.7 | $7.1 | $9.8 | | **Total** | **$1,727.0** | **$3,857.9** | **$5,584.9** | [Quantitative and Qualitative Disclosures About Market Risk](index=42&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk is interest rate fluctuation on its floating-rate debt, which is actively managed - The company is primarily exposed to market risks from movements in interest rates on its **floating-rate debt**[126](index=126&type=chunk)[480](index=480&type=chunk) - For every **100-basis-point increase** in interest rates on its revolving secured line of credit, annual after-tax earnings would decrease by approximately **$0.2 million**[97](index=97&type=chunk) - For every **100-basis-point increase** in interest rates on Term ABS 2021-1 (up to a 5.50% cap), annual after-tax earnings would decrease by approximately **$0.8 million**[98](index=98&type=chunk) - For every **100-basis-point increase** in interest rates on Term ABS 2022-2 (up to a 6.50% cap), annual after-tax earnings would decrease by approximately **$1.5 million**[482](index=482&type=chunk) [Financial Statements and Supplementary Data](index=43&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section contains the company's audited consolidated financial statements and accompanying notes for fiscal year 2022 [Consolidated Financial Statements](index=47&type=section&id=Consolidated%20Financial%20Statements) The statements show total assets of $6.9 billion and net income of $535.8 million for the year ended December 31, 2022 Consolidated Balance Sheet Data (in millions) | Account | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $7.7 | $23.3 | | Loans receivable, net | $6,297.7 | $6,336.3 | | **Total Assets** | **$6,904.7** | **$7,050.9** | | **Liabilities & Equity** | | | | Secured financing | $3,756.4 | $3,811.5 | | Senior notes | $794.5 | $792.5 | | **Total Liabilities** | **$5,280.7** | **$5,226.7** | | **Total Shareholders' Equity** | **$1,624.0** | **$1,824.2** | Consolidated Income Statement Data (in millions) | Account | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total revenue | $1,832.4 | $1,856.0 | $1,669.3 | | Provision for credit losses | $481.4 | $8.4 | $556.9 | | Total costs and expenses | $1,120.7 | $595.1 | $1,119.8 | | **Net income** | **$535.8** | **$958.3** | **$421.0** | | **Diluted EPS** | **$39.32** | **$59.52** | **$23.47** | Consolidated Cash Flow Data (in millions) | Activity | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | $1,238.7 | $1,069.4 | $985.2 | | Net cash from (used in) investing activities | $(460.6) | $437.3 | $(673.5) | | Net cash used in financing activities | $(794.6) | $(1,468.7) | $(433.2) | [Notes to Consolidated Financial Statements](index=54&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes detail accounting policies, loan data, debt facilities, and significant legal and regulatory contingencies - **Note 2 (Accounting Policies):** The company adopted the CECL standard on Jan 1, 2020, using different accounting methods for pre- and post-adoption loans[155](index=155&type=chunk)[213](index=213&type=chunk) - **Note 5 (Loans Receivable):** Provides a detailed reconciliation of the changes in the Loans Receivable and Allowance for Credit Losses balances for 2022, 2021, and 2020[566](index=566&type=chunk)[578](index=578&type=chunk)[605](index=605&type=chunk) - **Note 9 (Debt):** Details the company's various debt facilities, including a **$410.0 million** revolving credit line, five warehouse facilities totaling **$1.175 billion**, and **$800.0 million** in senior notes[635](index=635&type=chunk)[636](index=636&type=chunk)[638](index=638&type=chunk) - **Note 16 (Contingencies):** Describes significant ongoing legal and regulatory matters, including the joint complaint by the NY AG and CFPB, and investigations by the DOJ and other state attorneys general[725](index=725&type=chunk)[727](index=727&type=chunk)[757](index=757&type=chunk) [Controls and Procedures](index=95&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management and the independent auditor concluded that the company's disclosure controls and internal controls were effective - Management concluded that the company's disclosure controls and procedures were **effective** as of the end of the period covered by the report[513](index=513&type=chunk) - There were **no material changes** in internal control over financial reporting during the fourth quarter of 2022[514](index=514&type=chunk) - The independent registered public accounting firm, Grant Thornton LLP, provided an **unqualified opinion** on the effectiveness of the company's internal control over financial reporting as of December 31, 2022[519](index=519&type=chunk)[522](index=522&type=chunk)

Financial Data and Key Metrics Changes - Adjusted net income decreased by 26.6% from Q4 2021 to $156 million [33] - Adjusted earnings per share decreased by 17.7% from Q4 2021 to $11.74 [33] - Unit and dollar volumes grew by 25.6% and 26.2%, respectively, compared to Q4 2021 [42] Business Line Data and Key Metrics Changes - The provision expense for new loans was $60 million in Q4, which is lower than the previous quarter [4] - Forecasted collection rates for loans originated in 2021 and 2022 decreased, leading to a decline in forecasted net cash flows from the loan portfolio by $41 million or 0.5% [42] Market Data and Key Metrics Changes - The competitive environment has improved, with a more constructive market tone observed in January [7][38] - Funding markets for subprime ABS have shown signs of recovery, with spreads lower than late last year [5][6] Company Strategy and Development Direction - The company intends to tap the ABS market at the appropriate time, leveraging its strong liquidity position with $1.6 billion in unused availability at committed revolving credit facilities [10] - The company emphasizes maintaining a significant margin of safety in loan pricing to address uncertainties in the market [63] Management's Comments on Operating Environment and Future Outlook - Management noted that inflation and declining vehicle values have impacted loan performance, which has been worse than expected over the last few quarters [48] - The company is cautious about the future, acknowledging that used car prices remain elevated and the market is not yet stabilized [62] Other Important Information - The company disagrees with the allegations in the pending lawsuit and intends to vigorously defend itself [12][14] - The company has been proactive in adjusting pricing and risk assessments to maintain profitability amid economic uncertainties [65] Q&A Session Summary Question: What is the outlook for the competitive environment? - Management indicated that the competitive environment could become more intense if funding markets remain constructive [7] Question: Why not tap the ABS market given the origination growth? - Management stated they intend to tap the ABS market but currently have a strong liquidity position [10] Question: What are the implications of the lawsuit on accessing the securitization market? - Management confirmed that there is nothing in the lawsuit that would prohibit them from accessing the securitization market [22] Question: How does the company view the impact of inflation and vehicle values on loan performance? - Management believes inflation and declining vehicle values are primary factors affecting loan performance [48] Question: What adjustments are being made to pricing and risk assessments? - Management is adjusting pricing and maintaining margins to protect profitability amid economic changes [65]

Credit Acceptance Corporation (NASDAQ:CACC) Q3 2022 Earnings Conference Call November 1, 2022 5:00 PM ET Company Participants Doug Busk - Chief Treasury Officer Conference Call Participants Moshe Orenbuch - Credit Suisse John Rowan - Janney Montgomery Scott Rob Wildhack - Autonomous Research Jason Hahn - Principal Global Investors Operator Good day, everyone, and welcome to Credit Acceptance Corporation Third Quarter 2022 Earnings Call. Today's call is being recorded. A webcast and transcript of today's ear ...

Financial Performance - For the three months ended September 30, 2022, consolidated net income was $86.8 million, or $6.49 per diluted share, a decrease from $250.0 million, or $15.79 per diluted share, for the same period in 2021[226] - For the nine months ended September 30, 2022, consolidated net income was $408.5 million, or $29.74 per diluted share, down from $740.7 million, or $44.73 per diluted share, for the same period in 2021[227] - Net income for the three months ended September 30, 2022, was $86.8 million, down 65.3% from $250.0 million in the same period last year[259] - Net income for the nine months ended September 30, 2022, was $408.5 million, down $332.2 million or -44.8% from $740.7 million in 2021[270] - Total revenue for the three months ended September 30, 2022, was $460.3 million, a decrease of 2.1% from $470.1 million in 2021[259] - Total revenue for the nine months ended September 30, 2022, was $1,373.4 million, a decrease of $19.4 million or -1.4% compared to $1,392.8 million in 2021[270] Consumer Loan Performance - Consumer Loan assignment volume grew, with unit and dollar volumes increasing by 29.3% and 32.1%, respectively, compared to the third quarter of 2021[226] - The average Consumer Loan assignment for 2022 was $27,197, with an average advance of $12,938 and an initial loan term of 59 months[235] - The company experienced a decline in Consumer Loan assignment unit volume of 0.4% for the nine months ended September 30, 2022, while dollar volume grew by 11.5%[227] - Forecasted profitability per Consumer Loan assignment significantly exceeded initial estimates for loans assigned in 2018 through 2020[226] - Consumer Loan unit volume for the three months ended September 30, 2022, was 71,937, a 29.3% increase from 55,620 in 2021[252] - Consumer Loan unit volume from new active Dealers rose to 2,522, a 70.9% increase compared to 1,476 in the prior year[253] Collection Rates and Forecasts - Forecasted collection rates for Consumer Loans assigned in 2022 were 66.5% as of September 30, 2022, down from an initial forecast of 67.4%[231] - The forecasted collection rate for Consumer Loans in 2022 is 66.5%, with an advance rate of 47.6% and a spread of 18.9%[238] - The spread between the forecasted collection rate and the advance rate has ranged from 18.9% to 25.8% over the last 10 years, with a decrease from 2021 to 2022 primarily due to lower performance of 2022 Consumer Loans[239] - The forecasted collection rates for Dealer Loans and Purchased Loans as of September 30, 2022, were 66.1% and 67.3%, respectively, with corresponding advance rates of 46.5% and 50.1%[243] - The risk of a material change in the forecasted collection rate declines as Consumer Loans age, with over 90% of expected collections realized for loans from 2018 and prior[238] Expenses and Provisions - Total costs and expenses for the three months ended September 30, 2022, were $338.2 million, a significant increase of 145.3% from $137.9 million in 2021[259] - Provision for credit losses increased by $188.6 million, reflecting changes in forecasted credit losses[263] - The total provision for credit losses reached $351.1 million, reflecting an increase of $368.6 million primarily due to forecast changes[275] - Provision for credit losses for new Consumer Loan assignments increased to $283.5 million in 2022 from $298.9 million in 2021, a change of $(15.4) million[276] - Operating expenses increased by $43.2 million or 15.5%, primarily due to a $45.8 million increase in salaries and wages[274] Debt and Financing - The funded debt to equity ratio was 2.9 to 1 as of September 30, 2022, indicating the company's strategy to maintain modest financial leverage[247] - Total balance sheet indebtedness increased to $4,625.9 million as of September 30, 2022, from $4,616.3 million as of December 31, 2021, primarily due to stock repurchases[289] - Scheduled principal debt maturities total $4,647.3 million as of September 30, 2022, with $1,608.8 million due in 2023 and $1,293.8 million due in 2024[290] - The company completed a $350.0 million Term ABS financing on June 16, 2022, with an expected annualized cost of approximately 5.4%[285] - The maturity of the revolving secured line of credit facility was extended from June 22, 2024, to June 22, 2025, with a net decrease in the facility amount from $435.0 million to $410.0 million[287] Operational Adjustments - The company is considering options to further reduce office space, which may include the sale of one or both of its buildings in Southfield, Michigan[281] - Management believes that cash flows from operations and various financing alternatives will provide sufficient financing for debt maturities and future operations[291] - The company had $1,171.1 million in unused and available lines of credit as of September 30, 2022[289] - The company removed the COVID forecast adjustment in Q1 2022, resulting in an increase of $149.5 million in forecasted net cash flows[294] - The implementation of enhanced forecasting methodology led to a total increase of $95.7 million in forecasted net cash flows[294]