Good day, everyone, and welcome to the Credit Acceptance Corporation Third Quarter 2022 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 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 Third Quarter 2022 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 GAAP and adjusted results for the quarter include unit and dollar volumes grew 29.3% and 32.1% respectively as compared to the third quarter of 2021. A decrease in forecasted collection rates for loans originated in 2019 through 2022, which decreased forecasted net cash flows from our loan portfolio by $85 million or 0.9%. Adjusted net income decreased 18.5% from the third quarter of 2021 to $179 million. Adjusted earnings per share decreased 3.5% from the third quarter of 2021 to $13.36.
Stock repurchases of approximately 54,000 shares, which represented 0.4% 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.
Thank you. At this time, we will conduct a question-and-answer session. To ask a question, you will need to press star one one on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A roster. Our first question comes from the line of Moshe Orenbuch from Credit Suisse. Your line is now open. Moshe, your line is now open.
Oh, sorry about that. Thank you. I guess I'm trying to kinda think of a way to kinda connect, you know, the slower level of collections that you're observing and, you know, what the changes are that you're making to your, you know, to your estimate of total collections. I think the number was roughly twice as large in Q3 as it was in Q2. Maybe could you talk about how to relate that to kinda your adjusted yield, adjusted revenue as a percentage of adjusted capital? Thanks.
Well, I mean, relative to forecasting, you know, we always try to forecast collections as accurately as possible. You know, we price to maximize the amount of economic profit that we expect the loans we're originating will produce over time. In doing so, we certainly consider recent trends in loan performance. We're, you know, basically taking all the information that we have at our disposal and using that to forecast loan performance. I think it's important to note that, you know, forecasting collection rates is obviously pretty challenging. Our business model is designed to produce acceptable returns even if loan performance is less than forecast.
Having said that, the collection results during the quarter, together with recent originations, caused the adjusted yield to decline from where it was in Q3 of 2021 and where it was, you know, last quarter. That, you know, the collection performance in the quarter did contribute to a reduction in the adjusted yield. Is there something I missed?
I guess I'm trying to think about the adjusted yield into Q4, given that, you know, the reduction in collections in Q3 was roughly double where it was in Q2. I mean, is it kinda linear? Like, how do we think about that reduction in yield? It was, you know, something on the order of 100 and some odd basis points from-
Yeah.
You know, from Q2 to Q3.
I mean, there are a few different moving parts there. I mean, obviously, what happens to loan performance in Q4, you know, the expected return on, you know, recent originations, would both contribute. If you hold everything constant, the you know, decline in the collection performance that occurred in Q3 would have a negative impact on the adjusted yield in Q4. As I point out, you know, there are a couple of moving parts there.
All right. I got it. You know, this has all kind of occurred in something of a roughly stable employment environment. You know, can you kind of think about, you know, how we should, you know, think about those rates if employment were to improve or if it were to deteriorate from here?
You know, I think the best thing we can really look at there is, you know, our experience during the credit crisis. You look at the 2007 loans, which were originated in a pretty challenging environment, a challenging competitive environment which tends to hurt loan performance. You know, we did miss our forecast, but we missed our forecast by somewhere between, you know, 250 and 300 basis points. Now, you know, I'm not saying that's what would necessarily occur this time, but, you know, during the great credit crisis, our loans performed pretty close to our expectations.
Got it. Thanks. Last thing for me is, it looks like in the third quarter, your spread on new loans actually improved from the first half. Can you just talk about the underlying factors there? Thanks.
Yeah. I mean, It did improve about 100 basis points. You know, we try not to get into specifics of, you know, pricing and forecasting changes for competitive reasons.
Okay. All right. Thanks, Doug.
Thank you. One moment while we queue up our next question. Our next question comes from John Rowan with Janney. Your line is now open.
Good afternoon, guys.
Hey, John.
I'm gonna ask a different version of the last question. Your advance, specifically in the third quarter, was down a decent amount. Your spread was up. Your average volume per dealer partner was up. Those things typically have an implication if you wanna read the tea leaves as far as the competitive environment. I'm wondering if you could comment on that. Maybe in this conversation, overlay what's going on in the ABS market, whether or not smaller issuers are having trouble accessing the ABS market with what's been a pretty volatile spread environment, and whether or not that's helping you competitively. I know it's a loaded question, but I feel like all of those intertwine and we could have a discussion on it. Thanks.
Yeah. Well, I mean, I think you're right. You know, I think, you know, I don't know exactly what's in the minds of all the competition, but, you know, obviously, you know, conditions in the ABS market have been challenging as of late. Both base rates have increased and credit spreads have increased, particularly for subordinate bonds. It, you know, it wouldn't surprise me if, you know, people have reacted to that and are pricing their products, you know, somewhat differently than, you know, than they were six months ago, say.
I guess, you know, one of the competitive advantages that you have had in prior disruptions, particularly with the ABS market, is the ability to continue to access it. I'm wondering, you know, where do you think your spreads are going? Forget, you know, the changes in benchmark. That is what it is. But do you think your spreads are gonna continue to widen out? Do you know, how do you see your ability to access the ABS market?
I don't know what's gonna happen to our spreads in the future. I mean, it's just a function of capital market conditions. You know, certainly, you know, we think we, you know, present a compelling credit profile for investors. If you go back to the, you know, the great credit crisis, I mean, there was a period of time when no one was able to access it. You know, I think it really just depends on how challenging capital market conditions, you know, become. I think, you know, we obviously did very well during the credit crisis, and I think a lot of that, you know, despite being unable to access the ABS market for a period of a year or so, a lot of that was just the way, you know, that we positioned ourselves.
The same is true today. You know, we have a conservative balance sheet with modest leverage, have a significant amount of unused availability on our revolving credit facilities. I think you know, I can't say what's gonna happen in the ABS market, but I like the way that we're positioned at the current time.
Okay. Thank you very much.
Yep.
Thank you. One moment for our next question. Our next question comes from the line of Robert Wildhack with Autonomous Research. Your line is open.
Hi, guys. Doug, I just wanted to double-click on something you said. You know, when you hold everything else constant, the third quarter forecasted collections would have a negative impact on fourth quarter adjusted yield. Is that a one-time effect, as in the fourth quarter adjusted yield would be lower and that's it? Or does that trickle in over the life of the portfolio or loans or anything like that?
Yeah. I mean, since, you know, we're recognizing revenue on a level yield basis on our adjusted accounting, you know, that if loan performance, you know, didn't change after Q3, that lower yield would be realized in Q4 and subsequent quarters.
Okay. Got it. Then, just one more on competition. You know, subprime auto broadly has been a soft spot consumer credit for a little bit of a while now. I mean, do you get the sense that accelerating losses are causing competitors to pull back, or is it more funding costs driven?
You know, I don't have perfect insight, you know, into that. You know, my understanding is that, you know, credit in subprime land is generally, you know, normalized over time. It's certainly not as good as it was in 2020 and 2021. You know, I'm not close enough to what our competitors are seeing to comment beyond that.
Okay. Thanks.
Thank you. As a reminder, to ask a question, you'll need to press star one one on your telephone and wait for your name to be announced. One moment for our next question. Our next question comes from the line of Jason Hahn with Principal Global Investors. Jason, your line is now open.
Good afternoon, guys, and thanks for taking the question. This maybe piggybacks just a little bit off the last question. We look at a lot of different metrics for your companies, but one of the ones we look at is just sort of to gauge the overall financial health is just debt to cap. That, you know, that ratio has kind of ticked up to about 75% for the last few quarters. You know, in terms of your funding mix, you know, in terms of debt, we look at, you know, your senior unsecured debt to your secured debt, and that number tends to bounce around, I don't know, 20% or so for the last few quarters as well.
I guess just as you've seen the origination market turn and pick up pretty meaningfully, is there, you know, a target funding you have for each incremental dollar of sales or, you know, is there an upper bound on where that debt to cap or that senior unsecured to secured funding ratio might trend over the next few quarters? Thank you.
You know, we don't have specific targets for either, you know, debt to cap or as I think of it, you know, debt to equity or the mix of, you know, unsecured to secured. I mean, the way that we approach it is we take a look at different financing strategies and look at sets of financial projections and try to come up with a funding strategy that produces a good result when the capital markets are open and accommodating and produces an acceptable result when capital market conditions are more challenging. We don't have specific, you know, targets, but we're certainly considering, you know, risk and refinancing risk as we're making our decisions there. You know, obviously the leverage is ticked down this quarter.
You know, that's really just due to the fact that we're, you know, deploying more capital into funding the growth in loan originations, as opposed to, you know, repurchasing shares. You know, that's caused our leverage to, you know, moderate a little bit. It's worth pointing out that, you know, the leverage that we're looking at today is not directly comparable to what it was prior to January 1, 2020. You have, you know, two different methods of accounting here. You know, I think our leverage on our pre-2020 accounting is about 2.5 to 1. That would still be at kind of a, you know, roughly at the high end of the historical range, but it's obviously lower than on our current accounting.
Sure. No. That accounting change, that's fair 'cause that definitely had a significant impact. I just didn't know if there was just an upper bound on that ratio where, you know, there was a comfort level or a lack of comfort for management. Your answer is helpful. Thank you.
Yeah. I mean, there's not a hard and fast, you know, rule. If you look at our track record, I think we've run the company pretty conservatively for a long period of time, and I think you should expect that to continue.
Couldn't agree more. 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'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 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.