Credit Acceptance (NASDAQ:CACC) Q1 2020 Earnings Call

0:00 Good day, everyone, and welcome to the Credit Acceptance Corporation first quarter 2020 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 Senior Vice President and Treasurer Doug Busk.

0:20 Thank you. Good afternoon and welcome to the Credit Acceptance Corporation first quarter 2020 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.

1:09 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. At this time, Brett Roberts, our chief executive officer, Ken Booth, our chief financial officer, and I will take your questions. As a reminder, ladies and gentlemen, if you'd like to ask a question, please press star then one on your touchtone telephone. To withdraw your question from the queue, please press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Moshe Orenbook with Credit Suisse.

1:54 Your line is now open.

1:57 Great. Can you hear me okay? We can. Okay, thanks. I guess for starters, there's a bunch of new disclosure here, and I'm looking on page 23 of the 10Q. You know, and you've got your delinquency numbers. I guess, you know... How should we be taking those into account as we think about your provisioning practices in subsequent quarters?

2:32 I think the best thing to do in terms of understanding our provisioning is to look at our forecast of future cash flows and our forecasted collection rate. We think that that information is the most useful relative to assessing credit quality and and relative to understanding changes in future cash flows.

2:58 Right, although it's not really helpful in forecasting that loan loss provision, right? It's certainly not the only factor that's involved in that.

3:09 I think if we have any shareholders that are still focused on the provision, they need to go back and do some homework. The adjusted results are really what we look at to run the business and that's what shareholders should be looking at when they're trying to make an investment decision and there's no provision in the adjusted results.

3:30 And in terms of the in terms of the issue your forecasted cash flows you talked about kind of reducing your expectations by about 2% or in the neighborhood of $200 million dollars Can you talk about what you've assumed there? In other words, what's going on with respect to your borrowers who are currently receiving stimulus, what you've assumed about what happens when that is no longer in place? How should we think about that part of the process?

4:03 Right. So as we described in the release, there's really two components to the net cash flow change in the quarter. There's about 44 million, which is just the mechanical forecasting model responding to what happened so far in Q1. And then there's the remainder, about 162 million, is a subjective adjustment made on top of that to consider the ongoing impact of the COVID pandemic. If you look at the release, we provided some numbers on front-end collections and total collections, the year-over-year change. That's probably really the best place to look in the release for what's actually happened so far. There's two tables there. One is just the way the calendar falls, and the other one we adjust for the calendar to make it more comparable.

4:57 If you look at the second table, what you'd see is we saw pretty sharp fall-off in front-end collections in March, the last two weeks of March. Came back a little bit in April, particularly in the last half of April. and May so far has been pretty good.

5:13 How do we adjust that for the size of the portfolio? I assume that we should think about that as a percentage of loans, right? Not as an absolute amount.

5:25 In terms of the forecast change?

5:28 No. That's just a rate of change in the dollars collected, right? Year over year. That's not relative to your expectations. That's just What was it in 2019 and what is it in 2020, right?

5:41 Yeah, just a simple way to look at it. A reasonable assumption would be if you didn't see a change in the collections, then probably no forecast adjustment would be necessary. Since we did see a change in collections in March and April, the March change in collections caused that first part of the forecast I talked about, the 44 million And then because we're in the early stages of a pandemic, we expect there'll be an ongoing impact. So we made a subjective adjustment on top of that.

6:18 Right. I guess then I'll ask the question I asked before about those main numbers. I mean, you basically collected 8.5% more on the front end and 4.9% in total. But that is helped, as you correctly point out in here, that that's Can you talk about how much, like how you came out, came about that forecast?

7:05 I don't really want to get into the components. I think you're looking at a highly complex situation. I think we say in the release that given the number of variables, it's hard to have a great degree of confidence in any number that you would put forth. We took our best shot at it. The $162 million is our best estimate. We do say it's subjective. We'll just have to see how this pandemic transpires, how the economy transpires, how vehicle values respond. There's obviously a lot of variables to try to get your arms around.

7:38 Gotcha. I guess I was hoping to get some understanding of what they were. I mean, last question for me, and that is, if you were the customers who are now, the customers you're underwriting today, are they people with employment or are they people who are receiving stimulus checks and unemployment checks? Not stimulus checks, but unemployment checks. So would you underwrite a borrower who is being paid by the government, essentially?

8:04 The vast majority of borrowers are employed at the time the loan is made. Okay, thanks. Thank you. And our next question comes from John Rowan with Danny. Your line is now open.

8:22 Good afternoon, guys. So I just want to understand, with the reduction in repossessions, is that a function of forbearance or is that a function of social distancing and various state regulations?

8:35 There's a few states that have restrictions, and we're obviously following all those restrictions, but that was a decision that we made to stop repossessions early on in the crisis.

8:50 Okay, so the vast majority of that would be actually you guys giving out forbearance to the consumers.

8:57 Well, we made a decision not to repossess.

9:00 Okay. Do you still have a six-month net income covenant, positive net income covenant? I believe it might have been on the revolver at some point.

9:12 Yes, we still have that covenant.

9:15 Okay, so that would mean that next quarter you would need to post an earnings larger than or equal to the net loss this quarter not to break that covenant, correct? Correct.

9:30 Yeah, you need to make some adjustments to the first quarter loss for items that aren't counted there. But yeah, the idea is right. You'd have to have net income adjusted for certain items in Q2 that was greater than the net loss in Q1 adjusted for certain items.

9:50 Okay. Just looking at the 10Q, I just want to make sure I'm counting it correctly. It seems like there are three new issues as far as legal disclosures. A New York subpoena, it seems like you've gone back and forth with a new CID from the CFPB and then also something in Maryland. Am I reading that correct, or are those older issues that you're just updating?

10:15 Certainly Maryland and the CFPB are newer issues. New York, I think, existed prior to this quarter.

10:28 Okay. Okay. and then just lastly, you know, we've heard from some lenders that, you know, when they set their loss expectations and their provision and allowance, you know, they were using the March 31st economic forecasts. A lot of people have said, you know, we were using Moody's forecast of 9% unemployment. I just want to see, I mean, were you guys had a hard cut off of March 31st or are you treating the post-quarter end issue as a subsequent event and also including that in your loss estimate or in your provision expense here for the quarter?

10:59 You know, we're basically including everything we know up until we released and filed the queue.

11:07 Okay. All right. Thank you. Thank you. And our next question comes from Vincent Kaintick with Stevens. Your line is now open.

11:19 Hey, thanks. Good afternoon, and thanks for taking my questions. So first one, and I think something that I've gotten questions from a lot of investors is just when I think about your funding and some of the covenants to the funding, I'm just wondering if you could talk about if there's any issues there because there's been some discussion about that maybe with forecasted collections coming down, that could drive some triggers to your securitizations. Any thoughts there? Any concerns there?

11:51 You know, we have Two sets of governance in our securitization. One relates to early amortization events. So our securitizations revolve for 24 months after which they amortize. There are early amortization events that would cause that revolving period to cease and the amortization period to commence early. So that's one set of considerations. And then the other is The most relevant early amortization event currently is is one which would cause the revolving period to cease if cumulative actual collections are less than 90% of cumulative forecasted collections and that's based on a cash flow stream delivered at closing if it were less than 90% for three consecutive months.

13:18 At this point, we've accumulated a nice Thank you very much.

13:53 2.3%, which I think is pretty impressive. Is that the best comp against the 10% that you mentioned on the early amortization event?

14:04 I mean, you've got to consider both the amount and timing. It directionally goes the same way, but it's not exact.

14:18 Okay, that's very helpful. Thank you. Next question. Question on the competitive environment. So understanding that your volumes are down, unit volumes seem to be down more than dollar volumes. I'm just wondering if you're seeing in this environment maybe if some of the loans you're placing in April and May are higher quality than you would have gotten in the past. Because if I remember correctly, back in 2011, your spreads were good and the loan quality was good coming off of the last recession. So just trying to understand what maybe you're seeing now that maybe the bottom of this has been reached.

15:00 I think in terms of volume, what you saw in the first quarter is we were flat through February. March was down 20-plus percent as the pandemic started to impact our dealerships. April was down about the same. Although the last part of April was a lot stronger than the first part, and then so far in May we're up, you know, 20 plus percent. In terms of the quality, I think it's too early to say what happened, you know, at the end of the financial crisis, kind of 2008, 2009, was the loans performed better than you would have expected had you just looked at, you know, what we knew at loan origination.

15:46 A couple of reasons for that. One would be kind of reverse adverse selection in a highly competitive environment. We know the loans don't perform as well. That's because there's a lot of lenders competing for those loans, and so we get adversely selected. As competition thins out, you see the opposite impact. I think that's one reason why the 08 and 09 vintages perform so well. The second reason is that when competition thins out, it's very hard for borrowers in our market to get a loan. and they know that. They value the loan. We give them more than they would in a more competitive period and so they're more likely to pay for it and they probably realize that getting another loan if they don't pay for this one would be difficult.

16:34 So whether we'll see those two things play out this time or not, it's just too early to say.

16:40 Okay, very helpful. And then last question from me. So there are some concerns about the The auctions being closed, does that have much of an impact to your forecasted collections going forward? Thank you.

16:59 I'm sorry, what? I didn't catch the question.

17:02 Just about the auctions. Yeah, the auctions being closed, does that have a material impact on your collections, your overall collections?

17:13 Well, right now we're not repossessing cars. We had an inventory of that was at the auction when the crisis started, but a lot of the auctions are actually open. They're doing virtual sales, so we're able to liquidate some of the inventory that we had at the start of the crisis. We aren't adding to it now, so it really isn't an issue, but you'll see a timing difference. You can see that in the tables that we put in the release. Because we're not repossessing cars and we're not seeing those auction proceeds at their usual level, total collections have fallen more than Thank you very much. Thank you. Our next question comes from Randy Heck with Good Now Investment.

18:22 Your line is now open.

18:28 Brett, first of all, I want to say the quarter was pretty damn good relative to what I would have expected or probably anyone would have expected in terms of both collections, most importantly collections, but also origination. So first question is, The new chart you have in there for the percent. So what does that reflect? I mentioned the back end of May. The back end collections were up 7.3%.

19:16 Does that mean that you're now repossessing cars, or does it mean something else?

19:24 I didn't hear all that, Randy, but I think I heard enough of it to try to give you an

19:28 answer. Why are collections better in May than they were in January and February?

19:35 I think a couple of things. People got behind in March and April, and then I think you have to assume that the stimulus money that people received – possibly in addition to the enhanced unemployment benefits gave people enough cash flow to be able to make their payments. Having said that, I think if you'd asked me in the third week of March whether I think May collections would be growing faster than they were in January and February, I would have said no. That could never happen. So I do think you're right that so far what's transpired is far from a worst-case scenario.

20:10 Okay. And then the volumes, I thought, January, February, Flattish against, well, that reflected the old competitive environment. But May being up 22%, does that reflect any changes in your pricing, whether it's you've loosened pricing or did you do the opposite?

20:37 Yeah. I prefer not to get into pricing discussions, but as we said in the release, the two reasons why we believe that May volumes are better than the prior months, one is you started to see dealers open back up again. Now, that's not going to lead, obviously, to a year-over-year increase because they were open last year. I do think the stimulus money that's out there had an effect on our market, and it's certainly possible. We don't know this at this point that the competitive environment has improved. Okay.

21:15 The last thing I had was the estimated negative cash flow impact from the quarter. Normally, when you have negative variance in pools, you estimate the negative cash flow effect for the balance of the Your best answer at that point in time for the life of the loan, the remaining life of the loan. And so that's the $44 million that you noted. The $130 million, just so I understand that, that's over and above what you would normally be suggesting is going to be the hit over the life of the loan for the entire portfolio for the The balance of the life of the portfolio.

22:08 Is that correct?

22:10 Yeah, but I'd say it a little bit differently. So the $44.3 million, that's the model responding to what occurred in March. So we had obviously lower collections in March. Second half of March in particular, people weren't making their payments. So the model looks at that and says, okay, the customer missed their payment, so I'm going to look at all the historical data that looks like that customer that missed their payment, and it's going to reduce the estimated cash flows for the life of that loan. So it's just a model responding to what happened already in March. But the model doesn't necessarily know about COVID-19. It doesn't look out and say, well, not only did that customer miss the payment in March, but they're going to have continued difficulty in the future because of the uncertain economic environment. So that's where we have to go in and we have to make an adjustment on top of the model because we know the model doesn't consider The ongoing effect of the pandemic. So that's what the 162 million is. If you look back in 2008, we made a similar series of adjustments.

23:18 I think one in the second quarter of 08 and one in the fourth quarter of 08. About the same magnitude if you add the two numbers together in the low 2%. Those adjustments we made in 2008 turned out to be appropriate. If you look back on it, they were pretty accurate. Not to say the one we made this quarter will be accurate. I think it's too early to tell. But we don't think it's zero on top of the $44 million. We don't think the model incorporated everything bad that's going to happen in the future. But there's just too many uncertainties to have a lot of confidence that the 162 is the exact right number.

24:03 Okay. So essentially, it turns out we're talking $15 a share. More or less, it's the cost of the crisis. It's not an ongoing cost, but it's the cost of the crisis. And going forward, other things being equal, if history is any, if we can rely on history, the competitive environment is going to be substantially better. here on out for some period of time. And then just the last point I wanted to make was, once again, you wrote a beautiful letter to shareholders. I would suggest to anybody that just read it and a lot of these questions that are being asked on the call will be answered.

24:57 Thank you.

24:59 Thanks, Rainey. Thank you. Our next question comes from John Hecht with Jefferies. Your line is now open.

25:09 Thanks very much for answering my question, guys. Good afternoon. So I just want to make sure I understand the difference now between the gap and then adjusted earnings. I mean, we've always been accustomed to the floating yield adjustment. But effectively, what you're doing now, we want to just to make sure I've got my ducks in order. Do I add back the entire provision? But then to the extent you're going to make adjustments in your cash flow collections, that would affect yield on a going forward basis. In effect, take yields down a little bit going forward because of the loss of your expected cash flows. Is that the right kind of formula to deploy to this?

25:52 Yeah, I mean, that's the way that we look at it. As we run the business, we use the adjusted results. If we have a negative cash flow change, that reduces the yield. I think we disclosed that on the second page of the release in the adjusted results section. That's how we look at it. I think if you're trying to use the gap results to understand the economics of the business, I think it's very, very challenging to try to do that.

26:16 Okay. That's helpful. Thank you. Did you guys disclose or do you have plans of when you're going to get back in the market for repossessions? And second, is How much of your overall cash flows are reliant upon repossession-like activity?

26:36 We haven't made any announcement in terms of how we plan to pursue repossessions in the future. In terms of percentage of our total cash flows, somewhere around 6-7% is repossession proceeds.

26:52 Okay. And then I'm wondering, I mean, it's pretty impressive that you guys, you know, likely went from a largely intact call center focused collections to, I imagine, a large degree of work at home collections. Do you, I mean, were collections, was productivity impacted at all? Maybe if you could just give us some commentary about the adjustment to, you know, distant collections versus all in one center and how you guys adjusted so rapidly.

27:24 Yeah, I would say overall extremely pleased with that transition. The team was able to react very early. It went very smooth, not just in the collections area, but really in every area of the business. We've got a great culture. We've got great people. They're adjusting to a different work environment really in an extraordinary way. Couldn't be happier with how all that went.

27:53 Okay, I appreciate that. Thank you. Thank you. Our next question comes from Arjun Tuteja with Jaroslavsky Fraser. Your line is now open.

28:04 Hey, Brett. First of all, congratulations on getting featured on Lawrence Cunningham's book, Dear Shareholder. You know, he talks about all the CEOs which write good shareholder letters, and you made it there, so I think it's well-deserved. Congrats on that. Thank you.

28:24 So my question is about your latest shareholder letter which came out earlier this month. When I compare it to your 2007 letter which came out in March 2008, it seems you are a bit more cautious this time around. You talk about decreasing economic profit and you didn't talk a lot about competitors pulling back. though the last recession, you know, pointed out two different things and I think you were optimistic in your 2008 letter. So can you help me in understanding the difference the way you are seeing it?

29:03 Yeah, I don't know. I'd have to go back and, you know, read the prior letter. I don't know if I'm more or less optimistic, but we have, you know, we're in the early innings of what is a very significant challenge. You know, so far, I think there's certainly room for optimism when you look through the results from the first quarter, but you have to remember it's very, very early. This is something that is without precedent. We don't know how it's going to unfold, and I think if it came through in my letter that I'm cautious, that is an accurate reflection of how I feel.

29:45 Okay, okay. But do you see, say, unemployment going up, one thing. You know, unemployment went up in 2008 as well. Would this jump make you more cautious than last time, just because the number is higher as it is right now?

30:00 Yeah, I think so. You know, that crisis played out over a longer period of time. You had more time to react to what you were seeing. This crisis is much different. Not only is the magnitude different, much greater, but the time period has been greatly compressed. So again, I don't think there's a historical period you can look at and say, yes, it's going to play out exactly like that historical period. The financial crisis is as close as you get, but I don't think it's comparable enough to make me feel like caution isn't warranted.

30:41 Okay, okay. Thank you. Thank you. Our next question comes from Sanjay Sen with Bloomberg. Your line is now open.

30:50 Guys, just a couple of questions here. Brad, I know you said you didn't want to talk about pricing for you in specific, but if you could say anything at all about what you're seeing in the marketplace regarding pricing, that would be interesting. And then I had a bit of a housekeeping question for Doug there on the question on Covenant and the Revolver and net income and I just wanted to know, I think a couple of quarters ago you mentioned how lenders were using your adjusted net income numbers and I think Doug alluded to that there. We see the positive adjusted net income this quarter. Is that really what they're going to use and therefore you're well on site of any covenant issues with the revolvers?

31:37 Go ahead, Doug. No, you go ahead.

31:46 I don't really have any insight into how others are approaching their business from a pricing perspective. It's just too early. There's a lot going on. Customers have money because of the stimulus. You had a period where the dealerships were closed, so you might have some pent-up demand. You have dealers that were gradually opening during the latter part of April and May. And then you have the competitive environment. And breaking out all those factors at this point, I just don't have enough information to be able to give you much color on that.

32:14 Sure. Okay. Relative to the adjusted numbers, the adjusted numbers are used to determine the value of the loan asset for our borrowing basis on our revolving credit facilities. They are not the basis for the covenant that John Rowan required about earlier, the dollar of minimum net income for two consecutive quarters. So That's not the way that that covenant is calculated.

32:51 Got you. All right. Thank you. Thank you. Our next question comes from Rob Wildhack with Autonomous Research. Your line is now open.

33:02 Hey, guys. Question on borrower health and unemployment specifically. You know, when we've gone through previous downturns, you'd have borrowers who, you know, could find work, just maybe not the ideal level or lower levels. But this time you have a A different situation, you know, not only is unemployment significantly higher, but you're going to have people who are reluctant to return to work for safety reasons. You know, you're going to have industries totally changing the way they operate. How do you think about those things in this new environment and factor that in when you're forecasting collections?

33:39 Yeah, I think, you know, Your description of what's going to happen in the future is certainly one opinion. You say it with a lot more certainty than any opinion I would have on that. I don't really know how the economy is going to unfold. I don't even know how the health aspect of this crisis is going to unfold. So I think it's very difficult to pick a specific scenario and say, what do you think of that scenario? You're in a period, as much as everyone would like to see First quarter results where we say, here's the number. This is the impact of the crisis. We got that all figured out. It's just not possible at this point. It's just one of those situations where we're going to have to see how this unfolds over time. And as the impact evolves, our forecast will get more precise, and we'll be able to look back on it and say, this is the impact. But I think it's just too early to say that at this point.

34:31 Okay. Maybe to try and hit on the same thing in a different way, is there any more color you can give us on how we can connect what you're seeing today quantitatively, qualitatively in the economy and in your borrowing base that can translate to the adjustments you've made to your collections?

34:55 Yeah, I'll have to ask that a different way. I didn't quite follow.

35:01 Okay, we can call up offline. Thanks. Thank you. Our next question comes from Benjamin Wenger with Three Sigma Value. Your line is now open.

35:13 Hi. I'm looking at your board of directors on your website, and it's comprised of four members. I see Brett, the CEO, two guys affiliated with Prescott General Partners, which is your largest and longest standing investor for over 20 years, and Glenda, who's been with you since 2004. I guess my question is as a NASDAQ listed company, what are the requirements for the independence of a board of directors and specifically for an audit committee?

35:44 You'd have to look that up on the NASDAQ website. I don't know what that is off the top of my head. I'm sure that we comply.

35:50 You're sure that you comply? How about do you have anyone else on the line here who can confirm what the requirements are for independences?

35:58 No, that's not. I mean, call your lawyer.

36:01 Is your lawyer on there? Nobody knows?

36:06 You're asking me a legal opinion. I mean, go look it up. I'm sure we comply.

36:10 Thanks. That's all I have. Thank you. Our next question comes with Juliana Bologna for BTIG. Your line is now open.

36:24 Good afternoon, and thanks for taking my questions. I guess starting off, one of the things that I think would be interesting to get some perspective on, one of the other tests in your bond indentures is your fixed charge coverage ratio, which has impacted more so on a cumulative basis, looking back on a 12-month basis. But it really is measured with an EBITDA metric that's really on a gap basis. So if you saw another revision similar to the 08 scenario, you would probably trigger that, which would dramatically restrict your ability to take on any debt. Is there any kind of way to think about that covenant and how you could navigate around it?

37:02 You're referring to our senior notes?

37:04 That's correct, yes.

37:06 Yeah. I mean, the covenants in the senior notes are based on the accounting that was in effect at the time of issuance for the first one. Well, for both of them. Okay. The operative gap there is the gap that we were operating under last year.

37:33 That makes sense. And I guess one of the other things that would be interesting to get a little bit of perspective on, when we look at the securitization transactions, one of the levers that you do have is that you have the ability to over-collateralize certain transactions and effectively push more assets into certain transactions. Have you started doing that in any of the transactions at this point?

37:56 We've done that on a limited basis.

37:59 That makes sense. Then I guess on a slightly different, kind of another different point, you have that table that Moshe was referring to around your collection rates. One of the things that I'm trying to get a little bit of perspective on there, it looks like your average loan balance, if I kind of run more of an average balance, is up 11% to 12% in the first quarter of this year versus the first quarter of last year. and then you have that kind of adjustment that I guess levelizes it but doesn't seem to kind of foot directly with the 12% number and I'm assuming that's more so related to strong originations in the May timeframe. But if we think about those numbers, with that in mind, it looks like 4.9% up is net, that may be down if your loan size is up 12% or so in that ballpark and then kind of as a second point, If I then look at a lot of the unemployment collections and the stimulus checks, most of that came in in April, and you had some very large catch-up payments for a lot of the deferred and delayed unemployment checks.

39:07 Do you think that had more of an impact in terms of getting delinquent borrowers to temporarily re-perform, or was the impact different in terms of your ability to get better credit performance?

39:22 Yeah, I think it's very difficult to say. I mean, we had both of those occurring at the same time. You had customers that had missed their payments. You had the additional cash flow from the stimulus and potentially enhanced unemployment. And as a result of all those factors, we saw a rebound in collections in the last half of April and in May.

39:44 That makes sense. Then the only other thing is thinking about originations, is there any perspective on – How do you want to manage your originations going forward? And the main reason why I ask that is that if you continue up 20% versus last year, just the allowances alone could significantly impair your earnings stream and get you closer to that fixed charges covenant, in my model at least, obviously not your numbers. But I'd be interested in seeing how you think about those types of impacts, and would you go out and try and do some sort of consent to change any of the governance?

40:21 I think that we don't want to have the accounting dictate how we run the business. We want to run the business looking at the economics of the business. So if running the business the right way would cause us to potentially encounter a covenant issue in our revolving credit facilities, We'd prefer to run the business the right way and have a conversation with our lenders explaining why that's the prudent thing to do.

40:58 That makes sense. That's very helpful. I appreciate that and thank you for answering my questions. Thank you. Our next question comes from Thomas Shen with Golden Tree. Your line is now open.

41:10 Hi. In terms of Repossessions, I guess. What are the kinds of things that you're looking for before you're going to feel comfortable going forward with that?

41:28 Well, certainly, you know, I mean, one thing is in the, you know, several states that, you know, do have restrictions, you know, you obviously want to, you know, make sure that those restrictions are lifted. I think the rest of that decision is a judgment call that we'll make internally and we'll look at the degree to which the economy is open and people are employed in specific areas and try to make a subjective decision that is both right for ourselves and right for the borrowers. There's no No scientific formula that would tell you precisely when you ought to start repossessing, and I don't think one approach works for everywhere.

42:21 Would you go state by state?

42:26 I think it's a customer by customer decision. In a lot of ways, it's not really different than what we have done historically. You're trying to Work out an arrangement with the customer, if you can, that keeps them in the vehicle. That's always the best case for the customer and for us. If there comes a point where the customer is just unable to pay for the vehicle, at a certain point in time, you have to make the decision to repossess. The state-by-state certainly comes in. If there's specific orders in a given state, we obviously would follow those orders.

43:04 Got it. Thank you. Thank you. Our next question comes from David Scharf with JMP Securities. Your line is now open.

43:16 Good afternoon, and thanks for taking my questions. Most have been answered. I was wondering if there was any color you could provide on the May volumes. Obviously, there's likely to be some pent-up demand included in that increase, but Brett, I'm wondering, do you get feedback from your dealers about, for lack of a better term, something the equivalent of a take rate? Obviously, you're on a different origination kind of platform, but you had mentioned it may be a little too early to make any comments or conclusions about whether the competitive environment may be easing up.

44:01 But do you get a sense whether or not in the May volumes – Your dealers were finding fewer alternative financing options and that competition may be easing.

44:18 You have an anecdotal sense, but I'm reluctant to comment on the competitive environment until you have data that you can look at. You have pent-up demand, you have stimulus money, you have dealerships reopening, and potentially you have Thank you very much.

45:04 Is there any anecdotal information to share on, I guess, the overall health of the dealer network, particularly the independents, maybe the roughly two-thirds of the base that are independents? Are you aware of any attrition thus far among independent dealers through the crisis, or is it still early and most are hanging on?

45:31 I think it's still too early to say there. I'm sure that Like every business, or like most businesses, I should say, they're under a lot of stress because of the environment that we're in.

45:42 Got it. Okay. Thank you very much. That's all I have. Thank you. Our next question comes from Vincent Kaintick with Stevens. Your line is now open.

45:54 Hey, thanks for the follow-up. Two questions. First, for that six-month net income covenant, Could you let us know what are the exclusions or what are the takeouts from net income to come to the government?

46:09 I mean, you know, basically the biggest one would be, you know, non-recurring gains or losses. So, you know, you've got a, you know, $7 million pre-tax number this quarter. There's a couple other things that are less significant. But at the end of the day, it's not a, you know, based on the current quarter's results, Those adjustments aren't real material.

46:38 Okay, that's helpful. Second follow-up, so I understand that forecasts are difficult, and the collections forecast is based at the end of March, and CECL makes things even more volatile. But, you know, March volumes of payment collections were deteriorating. When I think about the disclosures you gave with May, it's getting a lot better. And so I'm wondering if we're using the data that we're seeing in May, could you actually see some of these numbers go in the positive direction, so meaning your forecasted collections being better than that 2.3% hit you're forecasting currently, and then from a seasonal basis maybe going in the other direction with a release?

47:29 I mean, you know, conceivably, I think that, you know, again, it's just too early to tell. A lot of variables out there. So, you know, as Brett said, I think it's really early. We'll just have to see how it goes. Certainly results in the latter part of April and in May have been encouraging, but there are a lot of variables out there. So we'll just have to see how that plays out.

47:55 Okay, understood. Thanks very much. Thank you. Our next question comes from Harold Levy with MCA Realty. Your line is now open.

48:06 Hi, guys. Thanks so much for the time. I just have one question on the financials. Looking at the cash flow statement, net cash from operating activities is pretty much equivalent to same time last year. But looking at the balance sheet, it looks like cash and cash equivalents have been drawn down significantly from $187 million to $25 million approximately. I'm just trying to tie out those two things and what's caused the significant cash decrease in the quarter.

48:40 I think the current quarter, if you look over a long period of time, is more reflective of how we've tended to run the business over time. We try to operate with less unrestricted cash as opposed to more because of the negative carry. and we rely on our revolving credit facilities as our primary source of liquidity. So I think the amount we were sitting on in cash and cash equivalents last year is unusually high just due to some financing activity that occurred in the latter part of last year.

49:21 Got it. That makes sense. And then on the cash flow statement, which, you know, just... If I'm reading this incorrectly, that's fine. But the net cash, you know, isn't really impacted, but the cash equivalents have gone down so much in the quarter. So am I missing something there, or how does that tie with one another?

49:47 I guess I don't really follow the question.

49:52 Okay, yeah, it looks like you guys utilized a lot of cash in the quarter for deployment, which is great. But the net cash slightly increased with the adjustment. Obviously, on an unadjusted basis, it would be a large negative number. But with the adjustment, at the same time last year, it's pretty much the same or slightly higher. So I'm just struggling to understand how – So much cash has been utilized effectively, I'm sure, but the net cash has increased slightly.

50:29 Well, there were a couple unusual, one unusual transaction that occurred during the quarter, and that's we repaid about $400 million in long-term debt. We also bought back about $300 million in stock during the quarter.

50:51 Okay, that's all. Thank you so much. Thank you. Our next question comes from Mark Hammond with Bank of America. Your line is now open.

51:01 Thanks. I noticed there was an increase in the share of the mix rather towards more purchase originations. I was just wondering what the cause of that was for the first quarter.

51:21 No specific reason. It could just be that franchise dealers got a little larger share of the consumer traffic during the pandemic. Franchise dealers, especially the larger franchise groups, tend to prefer the purchase program. So that may be the reason, although we don't know that for absolute certain.

51:46 Cool. Yeah, that's good. That makes some sense. That's what happened. And then lastly, I know you mentioned stock repurchases. And since I am a high-yield analyst, I have to ask if you've ever considered repurchasing some high-yield bonds with both of them around 90 as of yesterday.

52:11 Not really. You know, never say never, but I think our – Our primary focus is investing in new loans and secondarily buying back stock. We think that's the best use of shareholders' capital.

52:31 I appreciate the answer.

52:33 Thanks, guys. Thank you. As a reminder, to ask a question, you will need to press star then 1 on your touchtone telephone. To withdraw your question from the queue, please press the pound key. Our next question comes from John Rowan with Jani. Your line is now open.

52:49 Hey, guys. Thanks for the follow-up. Just connecting a couple of things you said, Doug. Why contribute more collateral, as you said, on a limited basis to some facilities if you weren't close to triggering an early amortization event? As far as I know, that is the cure for a shortfall in that 90% collection threshold.

53:14 Well, you couldn't violate the early amortization test. So if cumulative actual collections were less than 90% of cumulative forecast, that would lead to an early amortization event. You couldn't cure that by contributing additional collateral. You would have to basically proactively contribute excess collateral to securitizations to avoid breaching that trigger in the first place.

53:46 So is that why you contributed excess collateral to, as you said, a limited number of facilities during the quarter?

53:54 Yeah, we contributed to the more recently issued securitizations. The reason being is they've been outstanding for a shorter period of time and have had less time to build up a cumulative cushion versus the forecaster.

54:11 Okay, I mean, does that create a liquidity event for you guys? I mean, if we continue to have negative revisions to forecasted collections, will you continue to build in additional collateral? And then with the potential breach of a covenant on the revolver, how does that end if you, in fact, need to lean back on your revolver for liquidity if you're losing advance out of the ABS facilities?

54:41 We have over a billion dollars in unused and unencumbered collateral at the current time. We're in a very, very strong position in terms of excess collateral. All our securitizations are performing better than expected at this point. At this point, the securitizations aren't a near-term concern. Very happy with the performance there. as you suggested that minimum net income potentially may be a concern. And if it is, we'll have a conversation with the banks about it.

55:26 Okay. Thank you. Thank you. With no further questions in the queue, I would like to turn the conference over to Mr. Busk for any additional or closing remarks.

55:39 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 best relations mailbox at ir at creditacceptance.com. We look forward to talking to you again next quarter. Thank you. Once again, this does conclude today's conference call. We thank you for your participation.