Good afternoon, everyone and welcome to the Credit Acceptance Corporation Second 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.

Thank you. Good afternoon and welcome to the Credit Acceptance Corporation second 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 that declined 28.7% and 20.5%, respectively, compared to the second quarter of 2020, and an increase in forecasted collection rates for loans originated in 2017 through 2021. This resulted in a $104.5 million increase in the forecasted net cash flows from our loan portfolio. Adjusted net income, excluding a one-time reversal of stock compensation expense, increased 44% from the second quarter of 2020 to $221.4 million. Adjusted earnings per share, excluding a one-time reversal of stock compensation expense, increased 53% from the second quarter of 2020 to $13.18. We completed stock repurchases of approximately 598,000 shares, or 3.6% 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.

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

Thanks. Doug, if possible, could you talk a little bit about the $104 million that you said in terms of expected higher collections and just talk us through how that flows through both on a GAAP and an adjusted basis? Thanks.

Yes. The $104 million was driven by an improvement in the forecasted collection rates on loans originated in recent years. For adjusted accounting purposes, that improvement will be reflected as a yield on the portfolio that will be taken into our financial results on a level yield basis over time. For GAAP, the improvement in forecasted cash flows flows through the provision as a reversal of the provision and adjusts the allowance to the point where the net carrying value of the loan asset would equal the present value of the forecasted net cash flows.

Got it. Thanks. I saw on the SEC’s website that you filed a 10-Q. Is there any update from the standpoint of the litigation with Massachusetts or the CFPB that we should be aware of?

We do have a little bit of updated disclosure in the 10-Q relative to Massachusetts, particularly. We are continuing to work toward finalizing an agreement with the Commonwealth that is consistent with the tentative agreement we reached in April.

In that timeframe, it has been just over three months; that seems on the longer end for one of these. Is there anything else we should be aware of? We know you agreed to pay $27 million—anything beyond that?

We cannot really say anything other than what we have already disclosed. We are continuing to work with the Commonwealth toward an agreement that is consistent with the understanding we reached in April. Beyond that, we cannot really say anything.

Since there was a subsequent CID from the CFPB in June and this has been ongoing for a period of time, is there anything different in what they are asking for that we should know about?

I cannot really comment beyond what is in the 10-Q.

Got it. Okay. Alright, thank you.

Okay. Thanks, Moshe.

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

Thank you. Doug, with COVID cranking back up again and being very topical, and of course later this week, unless something changes, the eviction and foreclosure moratorium is running out, is it your expectation that, similar to the last two times early in the pandemic and over the extended winter period, there is a risk of another quiet period if the customer base is impacted by either fear of the disease or fear of making rent payments?

When you refer to a quiet period, what specifically are you referring to?

I am referring to the decline in business that occurred over the winter.

Certainly possible. I do not think many things in this pandemic have played out as anyone would have thought, so there is uncertainty about how things will progress from here. Anything is possible.

Second question: I have been watching Manheim get a little soft or possibly roll over. Would your optimism for the future increase if it did not cost an arm and a leg to get a used car in the future and more people could afford one?

Yes. That would be helpful. As we pointed out in our earnings release, used car prices being at elevated levels have presented challenges for our customer base, so lower prices would likely be helpful.

Okay. And then just a last one: you and many other financial institutions were beneficiaries of CECL reserve releases during this reporting period. Is there a chance for more reserve releases this year, or do you feel you have the best information right now?

We adjust our forecasted collection rates every month, and that adjustment is based primarily on how the loans actually perform versus our expectations. If loan performance continues to exceed expectations, which is far from certain, then there will be additional provision reversals. If loan performance declines, the opposite will occur, resulting in incremental provision. It is all a function of how the loans perform.

Okay. Thank you very much.

Next question is from the line of Rob Wildhack of Autonomous Research. Your line is now open.

Hi, guys. In the press release, you attributed the slowdown in this quarter’s unit volumes to reduced inventories and higher used car prices. Inventories have been depressed and used car prices have been elevated for some time now though. I am wondering if there is anything else that might have contributed to the deceleration in this particular quarter?

Nothing in particular. From our understanding, both used car prices, especially for our segment of the market, and inventory levels got incrementally worse during the quarter, so that was the most significant contributing factor. The other thing is that, as I look at the industry data, which we only have through May, it seems like we lost a bit of share in the quarter, which would be a contributing factor as well.

Do you have a hypothesis for why you might have lost share in the quarter?

The most likely explanations are that the inventory challenges have been more significant with independent dealers, and we get the majority of our originations from independents. There is also probably some reluctance on behalf of dealers, given the scarcity of inventory, to finance a loan with Credit Acceptance because the upfront gross is less than it would be with one of their traditional lenders. We have received feedback that some dealers, given the scarcity of inventory, are electing not to finance that consumer and are waiting for a higher credit quality borrower to come on the lot.

Thanks. I appreciate that you can’t comment on the lawsuit in Massachusetts or the settlement, but could you comment on your business in Massachusetts? Has there been any noticeable change in volumes or dealer relationships since you announced the preliminary settlement?

Nothing significant.

Next question is again from the line of Ray Cheesman of Anfield Capital. Your line is now open.

I just had a quick follow-up. There is an awful lot of capital out there that is chasing loans, and often people are being a little bit aggressive to get volume. You mentioned market share a minute ago. Are you seeing any disruptive players disturbing the market where you service your customers?

You are certainly right that the more capital the industry has access to, the more competitive it tends to be. I don’t have any particular insight into the business practices of others in the industry, so I cannot provide a detailed answer to your question, Ray.

But your market share loss is not because you feel someone is trying to dramatically undercut the rational rate that should be charged for the risk that’s assumed?

It’s really hard to say. There are lots of participants in the market. We price our business to try to maximize economic profit and to make an acceptable return based on what we forecast collections to be. We have looked at this from our perspective. We are disappointed that volume is down, but we view this as a temporary situation. How long it lasts, we don’t really know, but we think the market will stabilize at some point. We feel good about the business that we are writing.

With no further questions in the queue, I will now turn the conference back over to Mr. Busk for any additional or closing remarks.

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 [email protected]. 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. You may now disconnect.