Credit Acceptance Corporation (CACC) Q3 2021 Earnings Call Transcript

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Credit Acceptance Corporation (CACC -0.17%)
Q3 2021 Earnings Call
Nov 1, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

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 would like to turn the call over to Credit Acceptance Chief Treasury Officer, Doug Busk. Sir, you may now begin.

Douglas W. 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 2018 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 shares, 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.

Questions and Answers:

Operator

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

David Scharf -- JMP Securities -- Analyst

Hi. Good afternoon. Thanks for taking my questions. I guess first off, obviously the entire industry is kind of 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?

Douglas W. 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 kind of understand what's happening from an attrition perspective, would be to look at some industry data. But the problem with that is, that that's available on a lagged basis. So we 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 -- Analyst

Got it. Got it. And maybe just one follow-up. Once again, this is -- maybe it's more of a qualitative question without a crystal ball. But obviously, the rise in 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, is 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 in 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?

Douglas W. 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 if 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 -- Analyst

Got it. Got it. No, fair enough. I mean obviously a lot of unprecedented events we are all living through right now. Great. Well, thank you very much.

Douglas W. Busk -- Chief Treasury Officer

You bet.

Operator

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

Moshe Orenbuch -- Credit Suisse -- Analyst

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?

Douglas W. Busk -- Chief Treasury Officer

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

Moshe Orenbuch -- Credit Suisse -- Analyst

Got it. Okay. I did notice that the yield or adjusted ratable [Phonetic] though 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 persist? Is there any way to put some parameters around that?

Douglas W. 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 -- Analyst

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?

Douglas W. Busk -- Chief Treasury Officer

Yeah. If you think about that expense, we didn't begin recognizing that, until we receive shareholder approval in July. So we received approval July 21st. 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 would 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, is 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 -- Analyst

I see. So is that a calendar year? So, as you are saying, Q3 and Q4 will be the amount, that we would expect to see for the full year '22?

Douglas W. Busk -- Chief Treasury Officer

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

Moshe Orenbuch -- Credit Suisse -- Analyst

Okay. We will take it offline. We will figure it out. I did notice obviously a very large repurchase amount in '20 -- in the quarter, it looks like you bought back through October 25, based on the front end [Phonetic] of the Q, 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 think about that?

Douglas W. Busk -- Chief Treasury Officer

I think we are really just going to follow our standard approach to that. When we have 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, the originations have been challenging. We have got adequate capital. So at that point, we return to shareholders. So I would consider, we'd expect that to continue for a while.

Moshe Orenbuch -- Credit Suisse -- Analyst

Excellent.

Kenneth S. Booth -- Chief Executive Officer

Hey Moshe.

Moshe Orenbuch -- Credit Suisse -- Analyst

Yes.

Kenneth S. Booth -- Chief Executive 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 -- Analyst

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

Douglas W. 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 -- Analyst

Thank you for taking my questions. I have 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, of other loan streams like student loans on February 1st. 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?

Jay D. Martin -- Senior Vice President, Accounting & Financial Reporting

I mean, we don't have a crystal ball obviously, 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 doesn't really seem logical that those will continue forever. When they falloff, I think it's harder to predict. But I would expect at some point collections to go back to more normal levels.

Ray Cheesman -- Anfield Capital -- Analyst

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?

Douglas W. 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 -- Analyst

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 will call it a technical term play, 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?

Jay D. Martin -- Senior Vice President, Accounting & Financial Reporting

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 -- Analyst

Thank you.

Operator

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

Robert Wildhack -- Autonomous Research -- Analyst

Hi guys. Kind of more broader or strategic question, how do you think about the appropriate leverage level for running the business?

Douglas W. 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 run the liability side of the balance sheet, operating with a modest leverage and significant excess availability on the revolver. So it's kind of an output of an analysis that we do.

Robert Wildhack -- Autonomous Research -- Analyst

Okay. And then, would you say that the degree of leverage that you have today, that would be characterized as modest and meet all those criteria [Indecipherable] in excess availability?

Douglas W. Busk -- Chief Treasury Officer

Yes.

Robert Wildhack -- Autonomous Research -- Analyst

Okay. Thanks.

Operator

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.

Douglas W. Busk -- Chief Treasury Officer

We'd 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 [email protected]. We look forward to talking to you again next quarter. Thank you.

Operator

[Operator Closing Remarks]

Duration: 17 minutes

Call participants:

Douglas W. Busk -- Chief Treasury Officer

Kenneth S. Booth -- Chief Executive Officer

Jay D. Martin -- Senior Vice President, Accounting & Financial Reporting

David Scharf -- JMP Securities -- Analyst

Moshe Orenbuch -- Credit Suisse -- Analyst

Ray Cheesman -- Anfield Capital -- Analyst

Robert Wildhack -- Autonomous Research -- Analyst

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