Participants

Jay Martin; Chief Financial Officer; Credit Acceptance Corp

Kenneth Booth; President, Chief Executive Officer, Director; Credit Acceptance Corp

Jay Brinkley; Senior Vice President & Treasurer; Credit Acceptance Corp

Douglas Busk; Chief Treasury Officer; Credit Acceptance Corp

Moshe Orenbuch; Analyst; TD Cowen

Robert Wildhack; Analyst; Autonomous Research

John Rowan; Analyst; Janney Montgomery Scott

Jordan Hymowitz; Analyst; Philadelphia Financial

Presentation

Operator

Good day, everyone, and welcome to the Credit Acceptance Corporation first-quarter 2025 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 now like to turn the call over to Credit Acceptance Chief Financial Officer, Jay Martin.

Jay Martin

Thank you. Good afternoon, and welcome to the Credit Acceptance Corporation first-quarter 2025 earnings call. As you read the earnings 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 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 say that to comply with the SEC's Regulation G, please refer to the Financial Results section of our news release. This provides tables showing how non-GAAP measures reconcile to GAAP measures.
At this time, I will turn the call over to our Chief Executive Officer, Ken Booth, to discuss the first-quarter results.

Kenneth Booth

Thanks, Jay. Overall, we had another mixed quarter as it related to collections and originations, two key drivers of our business. Collections improved sequentially this quarter with only our 2022, 2024, and 2025 vintages, modestly underperforming our expectations, while our other business were stable during the quarter.
Overall, forecasted net cash flows declined by 0.2%, or $21 million, which was our smallest decline of the last eight quarters. During the quarter, our loan portfolio reached a new record high of $9.1 billion on an adjusted basis, up 10% from Q1 last year, although we experienced a decline in unit dollar volume growth.
Our market share in our core segment used vehicles financed by subprime consumers was 5.2% for the first two months of the year, compared to 6% for the same period in 2024. Our unit volume was likely impacted by our Q3 2024 score card change that has resulted in lower advance rates and increased competition.
Beyond these two key drivers, we continued making progress during the quarter towards our addition of maximizing intrinsic value and positively changing the lives of our five key constituents: dealers, consumers, team members, investors, and the communities we operate in.
We do this by providing a valuable product that enables dealers to sell vehicles to consumers regardless of their credit history. This allows dealers to make incremental sales to roughly 55% of adults with other than prime credit.
For these adults, it enables them to obtain a vehicle to get to their jobs, get their kids to school, et cetera. It also gives them the opportunity to improve or build their credit.
Our customers are people like Vivian from Maryland. Vivian is an elementary school assistant, a role that requires for the consistently and timely show off for children's with disabilities and special needs. After her vehicle was towed in an accident, she was left with other ways of transportation. She needed new vehicles, but worried about our ability to secure financing due to her poor credit history.
Her fears were confirmed when she was turned down for financing multiple times. Discouraged but not defeated, she found a dealership who approved her to finance a vehicle through Credit Acceptance. Vivian described the moment she was approved for finance as a turning point her life with a reliable vehicle to regain their independence. Vivian plans the Credit Acceptance again when it comes time to finance another vehicle, knowing she would be supported by a team that listens and puts her at ease.
During the quarter, we financed over 100,000 contracts for our dealers and consumers. We collected $1.4 billion overall on paid $68 million in dealer holdback and accelerated dealer holdback to our dealers. We have enrolled 1,617 dealers and now have our second highest quarterly number of active dealers with 7,789 dealers.
From an initiative perspective, we've made progress with our go-to-market approach with the goal of supporting our dealers faster and more effective than ever before. This requires teamwork, attention to detail, and an interim process that attempts to make improvement every step of the way.
We also continue to invest in our technology team the main focus on modernizing both our key technology architecture and how our teams work to support this goal.
During the quarter, we were named the Top Workplace USA award winner for the fifth year in a row with the number two ranking among companies of our size. Last year, we recognized a record 13 workplace awards, and we continue to focus on making our amazing workplace even better. We support our team members in making a difference to what makes the difference to them, raising money for five different charitable organizations that were selected by our team members.
Now Jay Martin and I will take your questions, along with Doug Busk, our Chief Treasury Officer; Jay Brinkley, our Senior Vice President and Treasurer, and Jeff Soutar, our Vice President and Assistant Treasurer.

Question and Answer Session

Operator

(Operator Instructions) Moshe Orenbuch, TD Cowen.

Moshe Orenbuch

Great. Thanks. I was hoping that we could talk a little bit about these forecast changes. As you mentioned, this was the smallest one in a while and yet you still had a $76 million portion of your GAAP provision related to it. And unlike last quarter, when you had a larger forecast change. You had an increase in the adjusted yield this quarter, it went down.
So maybe could you talk about how we should be thinking about those 2 items both in this quarter and going forward?

Jay Martin

Sure. First, I'll talk about your provision question, the $76 million provision for forecast changes. So what that is, is the impact of us, as the present value of future cash flows and that has two components. There is the change in undiscounted cash flows, which is the $21 million decrease that you referenced. And then there's also the slower cash flow timing on our total forecast net cash flow $2 billion.
Not to take much of a slowing on the $12 million cash flow to increase that provision. So that's what drove the provision for forecast changes for the quarter.
Now your point on the adjusted yield, there's a couple of things going on there. So if you look at page 10 of our earnings release, we added a new metric there, which is adjusted finance charges as a percentage of our adjusted loans receivable.
And what you'll see there is similar to last quarter, we did see an increase in the yield from the prior quarter. And that's due to the yields on the current quarter origination, the expected deals on those originations more than offsetting the decline due to the underperformance of the loans on the entire portfolio.
So we did see the adjusted yield increased slightly from Q4. Now what you're seeing is adjusted revenue and slightly adjusted capital, that did decreased from 18.4% last quarter to 18% this quarter. What was driving that decrease there where adjusted yield went off was due to $500 million of cash and cash equivalents on our balance sheet.
It's higher than what we normally have, just on to the timing of some recent debt issuances, coupled with slower loan growth. So we don't expect it to have cash and cash equivalents at that level. But that drove our adjusted capital growing faster than cash equivalents.

Moshe Orenbuch

Got it. And just to clarify on the GAAP provision, you -- I guess that means the cash flows were slowing somewhat in addition to that $21 million less in just nominal amounts, right?

Jay Martin

That's correct. It continues for prepayment lower than historical levels or at least lower than what our forecast is expecting. So we continue to see a slight decline nearing or slowing the timing.

Moshe Orenbuch

Yes. And in the opening comments, you talked a little bit about the volume. I noticed that you also had a slightly higher percentage, both purchased loans as opposed to portfolio loans. I mean, I guess that would -- I mean, I guess I'm not sure exactly what to make of that. Maybe you could expand on that a little bit, but I mean, it feels like, again, maybe at the dealer, more competition at the dealer. Is that what that would reflect?

Kenneth Booth

I think it's to pretty comparable. I think it's a modest change. Yes, it's 2 percentage point difference. I would say it's just a little more randomness or mix alone. So I don't necessarily think it means to the competition or anything necessarily.

Moshe Orenbuch

Okay. All right. Thanks very much.

Operator

Robert Wildhack, Autonomous Research.

Robert Wildhack

In the past, you've talked a decent amount about how forecasting models can be less accurate in periods of volatility. And I think we could all agree that the broader environment today looks to be a volatile one. So I guess should we expect more volatility around forecasted collections going forward? Or how are you thinking about the accuracy of forecasts moving through '25, given all the volatility in the broader market today?

Jay Martin

Yes. So our current forecast right now represents our last asset of how our loans are going to perform. So we know -- predicting all the performance is difficult and we can't predict the future any better than anyone else. So we feel like we have a pretty good track record. But there are a few things that could make it more challenging going forward.
First would be the impact of inflation. This declined some recently, but things still cost a lot more than three years ago. And then we know all of the impact of tariffs could have on inflation so that's likely to increase on inflation. And we also know that vehicle prices could decline, and that risk-testing might minimize the impact of tear-offs. Then, thirdly, potential recession, all that can happen there.

Robert Wildhack

Okay. And then on a similar point, the 2022 vintage and performance there was marked by a period of elevated inflation whether it's the '24 or '25 or even '26 vintages, those are likely to be fined by tariffs and maybe a reduction. Is the source of the volatility a big deal? Or is all volatility the same? Like is inflation different inflation induced volatility different from like tariff-related volatility?

Jay Martin

It's tough to say exactly it all depends on the of the impact of inflation, things like we hope the prices have less of an impact our forecasted collection rate. So we just really don't know at this point because what we know about is our process what we know today.
We also know the '22 loans beyond just inflation. There are some other factors on why those have underperformed. A couple of those would be that the loans are originated in a very competitive period.
It's generally, here's first loan performance, as purchase being able to peak valuations, vehicle prices subsequently decline and then the much inflation.
So we also know what we saw in the '22 loans, not unusual compared to what we see others

Jay Brinkley

Just to jump in there, too. That's the reason we can't predict when the volatility is going to come or what's going to be more volatile, and that's why we price our loans with a big margin of safety, so that they'll most likely still produce a good result regardless of those economic factors.

Robert Wildhack

Got it. And then just quick. You touched on the cash and I hear you that this quarter was impacted by the recent debt issuance. But more broadly, like you used to run with a single digit million cash number, and it's been up in the hundreds for the last three quarters. So why the longer-term increase there.

Jay Brinkley

Well, I mean this is Jay Brinkley. Similar to what we said last quarter, we took a fairly conservative stance going into Q4 with the unknowns related to the election and what impact it would have on the capital markets. Really, we saw no reason to change that stand. There's a lot up in the air, obviously, we were pretty active during the quarter. As you saw, we refied our '26 notes and upsized by $100 million.
We also closed a securitization at the end of the quarter. I think in terms of timing, we feel pretty good about getting in and out of the market, what we did. I think have gotten fairly volatile out there and feels good to be in the cash position that we are right now rather than having an issue to a volatile capital market environment.

Robert Wildhack

Okay. Thank you.

Operator

(Operator Instructions) John Rowan, Janney.

John Rowan

Good afternoon. Just curious, why did you guys decide to accelerate dealer holdback?

Douglas Busk

This is Doug. I can handle this. What we're trying to do with dealer holdback in general is incentivized dealer behavior, primarily at the time of origination because they get -- part of their compensation is dealer holdback that is based over time on the performance of the loan. So the problem you have with that is you're trying to incentivize dealer behavior today with additional profitability that will occur 30, 36, 42 months from the point of origination. So we accelerated dealer holdback and we've been doing this for many, many years.
to try to create a better linkage between dealer behavior and origination in that collection-related profit or dealer holdback.

John Rowan

Okay. I guess just one accounting question. There was a pretty big jump in salaries and wages. Is that a good run rate going forward?

Jay Martin

Are you comparing some wages to Q4 of last year or Q1 of last year?

John Rowan

I'm just looking at the $88.6 million reported.

Jay Martin

Yes. I would say there's some seasonal improvement. There's some seasonal match in Q1 that tends to have operating expenses higher has to do with our payroll taxes, volume is seasonally higher low unifying seasonally higher in Q1, which impacts sales commissions we also have higher fringe benefits as well. If you do look at Q1 versus last year, you will gain some operating leverage that's declined the salaries' average level.

John Rowan

Okay. And then you mentioned something earlier. I make sure I heard it correctly. You said you had a 5.2% market share versus 6% last year. What time frame was that?
And you gave you talked about something about vantage score. Just can you repeat what you said? So I have it.

Kenneth Booth

The 5.2% was for the first two months of the year because we don't have to average for March yet. And then the 6% for 2024 was also the same period. So -- and what was the second part of your question again?

John Rowan

You mentioned something about vantage scores being the reason for that. Can you just go over that again?

Kenneth Booth

I think -- maybe I didn't speak clearly or maybe you heard it wrong, but what I said was our unit volume was slightly impacted by our Q3 2024 scorecard change resulted in lower advance rates and also increased competition.

John Rowan

Perfect. Thank you very much.

Operator

Jordan Hymowitz, Philadelphia Financial.

Jordan Hymowitz

Thanks. A couple of questions. One is, the CFPB recently dropped its lawsuit against you guys. Can you give us a sense of how much of legal fees were spent in the first quarter in that case that won't be repeated?

Jay Martin

No. We don't comment on legal costs and that are material to our financials. So we won't comment that we've disclosed in our filings. What I would do though is just reiterate what we put in released last week that we're pleased with the CFPB's decision to withdraw from the case as it should limit the scope to New York consumers only. As we have outlined in our motion to dismiss, this lawsuit seeks to create new law and litigation, legal theories with established statutes, but we won't count in legal reserves or legal expenses.

Jordan Hymowitz

Whatever would be there would be going down. My next question is, you're getting closer and closer to not providing or writing down older pool. You spent $76.3 million in the quarter. If I just tax effect that number, it's about $5.5. But when I think about your earnings power being closer to like $13.5, $14 today, if there were no changes for write-backs to older pools?

Jay Martin

We think the best way to look at our financial results and looking at our adjusted financial results. So I would use that as your product.

Jordan Hymowitz

Okay. And were there any other onetime things that you're not going to break out the legal piece like you've been spending a lot on IT and other things that may come down going forward?

Kenneth Booth

We have had elevated levels of investments in the business in recent years. A lot of these have been foundational trying to get things like sufficient talent density, changing our design, modernizing our tax stack. I think at some point, they would come down.
But once we moderate our tax stack that, we're then looking at making a lot of changes and trying to improve our products. So I don't foresee in the relatively near future the elevated levels coming down, although I will say we hope to start to see more of a return on them once we get passed upon this.

Jordan Hymowitz

Okay. Thank you.

Operator

Thank you. With no further questions in the queue. I would like to turn the conference back over to Mr. Martin for any additional or closing remarks.

Jay Martin

We would like to thank everyone for their support and for joining us on the 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.

Operator

Thank you. Once again, this does conclude today's conference. We thank you for your participation.