Credit Acceptance - Earnings Call - Q3 2025

Executive Summary

• Q3 2025 adjusted EPS rose to $10.28 per diluted share (GAAP $9.43), with adjusted net income of $117.9M; GAAP net income was $108.2M as lower credit loss provision and higher portfolio yield offset higher OpEx and legal contingencies.
• Versus Wall Street, S&P Global consensus EPS was $9.45*, so adjusted EPS delivered a clear beat while GAAP EPS was essentially in line; revenue of $582.4M came in modestly below the $592.8M* consensus, a small miss.*
• Portfolio metrics: adjusted loans receivable remained near a record ($9.07B avg; $9.07B ending), while forecasted net cash flows declined by 0.5% ($58.6M) amid slower timing and mixed vintage performance (weak 2022–2024, stronger 2025).
• Strategic/catalyst items: $107.4M of buybacks (~230K shares, ~2% of shares) and a $500M ABS at ~5.1% cost (lowest cost since late 2021) enhance capital deployment and funding visibility; management emphasized competitive intensity and pricing discipline, with CEO Ken Booth announcing his retirement (remains on Board).

What Went Well and What Went Wrong

What Went Well

• Adjusted EPS up 11% YoY to $10.28, with adjusted net income up to $117.9M despite a difficult collection environment: “We are pleased to report growth in adjusted EPS…” — Ken Booth (CEO).
• Finance charges increased 6.3% YoY ($539.4M) driven by higher average loan balance and higher contractual yields on recent assignments; adjusted finance charge yield stabilized sequentially (16.8%).
• Capital deployment and funding: repurchased $107.4M in shares (~230K); completed a $500M ABS financing with expected average annualized cost ~5.1% and noted ~$1.6B unused revolver capacity at quarter-end, signaling ample liquidity and favorable ABS access.

What Went Wrong

• Consumer Loan performance underperformed initial forecasts across 2022–2024 cohorts, contributing to a $58.6M (0.5%) decline in forecasted net cash flows and ongoing slower timing from lower-than-expected prepayments.
• Originations remained pressured: unit volume down 16.5% YoY (79,916) and dollar volume down 19.4% YoY; active dealers fell 4.7% and average volume per dealer dropped 12.2%, reflecting competitive intensity and tighter scorecard/pricing.
• Operating expenses rose 13.3% YoY (+$17.2M) with G&A up 25.2% (+$7.3M), including a $15.0M contingent legal loss tied to multi-state and NY AG matters; adjusted operating expenses still increased 7.7% YoY.

Transcript

Speaker 6

Good day, everyone, and welcome to the Credit Acceptance Corporation third quarter 2025 earnings call. A webcast recording 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 Financial Officer, Jay Martin.

Speaker 2

Thank you. Good afternoon and welcome to the Credit Acceptance Corporation third quarter 2025 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 them with GAAP measures. At this time, I'll turn the call over to our Chief Executive Officer, Ken Booth, to discuss our third quarter results.

Speaker 1

Thanks, Jay. Our results for this quarter reflected steady execution with declines in loan performance and year-over-year originations volume, balanced by a portfolio that remains at a record high. Loan performance declined this quarter with our 2022, 2023, and 2024 vintages underperforming our expectations and our 2025 vintage exceeding our expectations, while our other vintages were stable during the quarter. Overall, forecasted net cash flows declined by 0.5%, or $59 million. During the quarter, we experienced a decline in unit and dollar volumes, though our loan portfolio remained at its record high of $9.1 billion on an adjusted basis, up 2% from last Q3. Our market share in our core segment of used vehicles financed by subprime consumers was 5.1% for the first eight months of the year, down from 6.5% from the same period in 2024.

Our unit volume was impacted by our third quarter 2024 scorecard change that has resulted in lower advance rates and is also likely impacted by increased competition. Beyond these two key drivers, we continued making progress during the quarter towards our mission 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 the 55% of adults with other-than-prime credit. For these adults, it enables them to obtain a vehicle to get to their jobs, take their kids to school, etc. It also gives them the opportunity to improve or build their credit.

Our customers are people like Becky, a single mother who has faced significant financial challenges. Her career as a chef meant that her hours and her paycheck were unpredictable. Between this and needing frequent car repairs, she was living paycheck to paycheck and was struggling with poor credit after falling behind on her bills. Determined to turn things around, she was eventually able to finance a dependable vehicle through Credit Acceptance, which gave her stability and relief despite continuing to face financial hurdles. Credit Acceptance worked with Becky to come up with a realistic payment plan and provided her the flexibility she needed to get back on track. Becky hopes to be able to purchase a home in the near future and urges others with similar struggles to look to Credit Acceptance. During the quarter, we financed almost 80,000 contracts for our dealers and consumers.

We collected $1.4 billion overall and paid $52 million in dealer holdback and accelerated dealer holdback to our dealers. We enrolled over 1,300 new dealers and had 10,180 active dealers during the quarter. We continue to invest in our engineering team, which is focused on modernizing both our key technology architecture and how our teams perform work. The engineering team has made significant strides in modernizing our loan origination system. This modernization has laid a strong foundation for innovation, frictionless dealer experiences, and we've increased the speed that we deliver enhancements to our dealers by almost 70% compared to a year ago. This allows us to innovate faster and accelerate value to our business and customers.

During the quarter, we received four awards for our amazing workplace, including being named one of the best workplaces in financial services and insurance by The Great Place to Work and Fortune Magazine for the 11th year in a row. We're proud to be one of the few companies in our industry that offers remote-first work. We work hard to ensure that every team member feels supported and connected, keeping our culture strong. In July, team members from around the country gathered in Detroit to celebrate the company's 53rd anniversary. During this celebration, we recognized eight of our team members, each of whom had been with the company for more than 30 years. Additionally, on a personal note, this will be my last quarterly earnings call.

After starting my career over 34 years ago, including the last 22 years at Credit Acceptance Corporation, I've decided to retire and embark on the next chapter of my life. My decision wasn't easy. I will miss working with our amazing team members, and I'm so proud of everything we've accomplished together. I believe the company is in great position for the future. During his four-and-a-half-year tenure on the board, Vinayak has been an invaluable partner as we modernized our approach to the business. His strong mix of experience in technology, marketing, engineering, and product, along with a proven track record of driving transformation and growth, will be an excellent complement to our experienced management team. I look forward to both working alongside Vinayak as he transitions into his new role and continuing to serve the company as a board member going forward.

At this time, Jay Martin and I will take your questions, along with Andrew Rostemi, our Chief Product and Marketing Officer, Jay Brinkley, our Senior Vice President and Treasurer, and Jeff Sutar, our Vice President and Assistant Treasurer.

Speaker 6

To ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from John Rowan with Janney Montgomery Scott. Your line is open.

Speaker 3

Good afternoon, guys. Your asset-backed securities used to have a covenant in them that said if there was a 10% forecast shortfall, that it would enter into early amortization. Does the current ABS still have that, and are you close on any of those? I mean, just looking at the 2022 vintage, it's down 8% relative to the initial forecast. Is that the right way to look at it? Just walk us through kind of the ABS covenants there.

Speaker 1

Yeah, absolutely. We still have that covenant in both our warehouse facilities and our ABS securitization debt. As you know our business well with the pooling concept, we tend to contribute loans to a securitization for our Portfolio Program, a lot of which are uncapped. As additional loans are originated, they belong to the securitization. If you were to look at the actual performance from a collection rate standpoint, they tend to run above 100%. We have no outstanding securitizations that are close to the 90% trigger.

Speaker 3

Okay. G&A was still higher than I expected. Obviously, last quarter you had a contingent legal loss in there, but it didn't go back to the run rate of prior quarters. Can you give us an idea if there was any kind of one-time items in the $36 million G&A expense?

Speaker 2

Yeah. I would suggest that you look at the adjusted results. We've used that to eliminate the one-time charges related to the contingent legal losses. I think if you look at that, you'll see G&A is fairly consistent the last several quarters as a percentage of average capital. You're right, if you're looking at just the GAAP, we had a $23.4 million contingent legal loss in Q2, and we had an additional $15 million contingent legal loss this quarter.

Speaker 3

Okay. Can you let us know what your share repurchase authorization is?

Speaker 1

Yep. We've got just over 2 million shares currently under the board authorization.

Speaker 3

Okay. Just last question for you. I was a little bit surprised to see the advance rate was actually up a little bit in the quarter relative to the first half of the year, but unit volume still continues to decline. Obviously, the advance rate's not back to where it was. Can you just talk us through that a little bit? Are you still having trouble, competitively speaking, even at a higher advance rate?

Speaker 2

I think it's really a little bit of a change in mix in our business. I think there's a higher % of purchased loans. I also think there's a higher % of our product that is designed for people with a little bit better credit. Those tend to have higher advance rates.

Speaker 3

Okay. All right. Thank you.

Speaker 6

Thank you. Our next question comes from Robert Wildhack with Autonomous Research. Your line is open.

Speaker 4

Hi, guys. Are you seeing any of your peers pull back at all in the industry? I just would love to get sort of the boots-on-the-ground view of what's happening at the industry level in the wake of some of the headlines we've seen around subprime auto in the last couple of weeks.

Speaker 2

I think overall, while there have been some that have had struggles and have pulled back, in general, the environment's very competitive right now. We're seeing a lot of competition out there. You can look at our volume per dealer, and it's down. It's a competitive market.

Speaker 4

Why do you think the competitive intensity hasn't really reacted to the poor credit results that we've seen for the last few vintages? I would have expected people to pull back a little bit more with the delinquencies and losses as high as they are.

Speaker 2

It's always hard to tell what our competitors are doing. The market's fragmented. Oftentimes, at the beginning of downturns, it is a competitive environment. We've lived through this before. 2021 was super competitive, and those vintages ultimately didn't turn out very well. 2016, 2007, I mean, there have been times where it's been like this. I will say this has been a long time where it's been competitive, and we're seeing underperformance. I will say we build our business for the long run. Our goal is always to have a large margin of safety in the aggregate in our pricing. We're at a point where our loan portfolio is kind of at the highest it's been, and we'd rather do a little less volume at solid margins than chase volume. That's where we're at on that.

Speaker 4

Okay. Just quickly, we noticed that attrition had been increasing in the last few quarters. Could you comment on some of the drivers there? Is there a chance that dealers are pushing back on the scorecard change or anything like that?

Speaker 2

It could be a little bit. The way we measure attrition is if they've done a deal in the period shown. Given that we've got our lower volume, we've got some dealers that just aren't doing business with us right now. I'm sure a little bit that's the scorecard, but it's also our scorecard relative to what everybody else is doing. Like I said before, it's a large fragmented market, so there's lots of different options out there. I would point out, though, that while it's been a challenging year for growth for Credit Acceptance, we're coming off our record year last year, and this will still end up probably we're kind of trending towards it being our fifth best year ever. It's not like we've gone super, super far backwards. We've got tough comparables.

Speaker 4

Yep, okay. Thank you.

Speaker 6

Thank you. As a reminder, to ask a question, please press star 11 on your telephone. Again, that is star 11 to ask a question. Our next question comes from Ryan Shelley with Bank of America. Your line is open.

Hey, guys. Thanks for the question. I wanted to ask around the impact of tariffs. I mean, obviously, it's kind of on again, off again. Have you guys seen any profound impact, whether it's in the marketplace or to your own business from federal policy? Just going into next year, how do you guys kind of handicap that? Thanks.

Speaker 2

Anything that impacts affordability for our consumer is a negative for us generally. Our consumer already has affordability issues, and anything that tends to impact affordability will be a negative. It's hard to say how much the tariffs are impacting things. They seem like they change quite a bit. Anything that puts pressure on our consumers from an affordability standpoint ultimately is generally not good for us and good for people in our industry.

Got it. Thanks. Just one more, if I could, on this scorecard change. Forgive me if you've already clarified this. Going forward, is there a potential for any loosening or change back, maybe come next year or the year after, or is that a permanent change going forward? Thanks.

We always try to price to maximize the amount of economic profit we originate. We consider recent trends in loan performance and capital market conditions. We adjust our scorecard and our pricing based upon what we think we're going to collect and how we think we can maximize that economic profit originated. I don't know what the future will hold. It's not like this is probably the permanent scorecard from now until the end of time. As the situation changes, we make updates to it. We always try to maximize economic profit originated.

Got it. Thanks for the questions.

Speaker 6

Thank you. Our next question comes from Moshe Orenbuch with TD Cowen. Your line is open.

Speaker 4

Great, thanks. Maybe just to come back a little bit to the volume story and market share, because I guess, do you attribute it to supply of vehicles being down, or are there cars being sold and just some competitor is financing them? By October, you fully anniversary the scorecard change and still down double-digit, maybe not as much as in Q3, but still down pretty hard. Any way to think about that?

Speaker 2

Your question's a great one. We are, I would say, anniversary on the scorecard change for sure by October. While it happened in Q3, there's a little bit of a lag, but by October, it's more apples to apples. I will say that Q4 last year was one of our better quarters. It was the second best Q4 in the history of the company, so it's still a little bit of a tougher comparable. You're right, you wouldn't have expected it to be down as much as it is other than the fact that the intensity of the competitive environment's probably higher. I do think, as you mentioned, affordability of vehicles has been a detriment to us. Our consumer is challenged by prices, and they're kind of getting squeezed out.

If you were to look at the size of the subprime market, it has declined over the last four or five years. It seems like it's kind of stabilized somewhat right now, but our consumer has a lot of pressure on them in order to try to make purchases, which I think is impacting us negatively because we tend to be a little bit deeper in the subprime space than some other companies.

Speaker 4

Got it. I guess from the competitive standpoint, because the other aspect that's been an issue this year, the first last three quarters, has been the fact that your prepays have slowed. I mean, you still got a full quarter of the 2022 vintage still on the books, right, at the end of September. Wouldn't it stand to reason that if competition were higher, there would be somewhat more prepays, not less?

Speaker 2

Can you say the question again? I didn't quite understand what you had.

Speaker 4

Sure. Yeah. I mean, one of the phenomena that you've observed this year has been that the loans are staying on the books longer. I think you had said in the second quarter call that that was an issue, that there were just fewer people who were able to either refinance or trade into another vehicle. I guess, wouldn't a competitive environment be easier to turn that in as opposed to harder?

Speaker 1

Yeah. I think generally, over time, what you've seen is sort of a lag effect of when competition heats up, prepays tend to speed up because obligors have other options. I think what you're pointing out here, Moshe, is that we're not really seeing that. It's tough to say. There is always a natural lag. I just think we're in a unique environment right now.

Speaker 4

Got it. In terms of your leverage.

Speaker 2

If history holds true.

Speaker 4

Yeah.

Speaker 2

I was just going to say, if history holds true, we should see prepays tick up if competition continues.

Speaker 4

Got it. Could you, this $15 million contingent loss that you talked about, I guess it said it related to previously disclosed legal matters. I guess the dollars are coming because you're making settlement offers in the lawsuit, right? I mean, that's what it says in the 10-Q, which I think is the first mention of that. Is there any way for us to kind of think about whether there are other terms that we should be aware of that might be part of that settlement?

Speaker 2

You're correct. This is the first time that we've mentioned that. I would tell you since it is an ongoing legal matter, we can't comment on it beyond the disclosures we've included in the 10-Q and the earnings release. We can't provide any more detail than what's out there.

Speaker 4

Gotcha. Appreciate that. Just last one for me. Maybe just talk about your leverage and your kind of outlook given what you're seeing both from a growth and how that impacts your thoughts on share repurchase.

Speaker 1

Yeah. Our current leverage on an adjusted basis is at the high end of that historical range. We've tended to operate in that two to three times adjusted debt to equity range. As we've talked about, all else equal, we tend to generally repurchase more shares when our leverage or growth rates are lower. I would also say that our leverage is modest relative to other industry participants. I don't think there has been a wholesale change in how we view the leverage on our balance sheet. As we think about repurchasing shares, leverage is certainly a key aspect of that dialogue.

Speaker 4

Got it. Thank you.

Speaker 6

Thank you. Our next question comes from Kyle Joseph with Stephens. Your line is open.

Speaker 0

Good afternoon. Thanks for taking my questions. I just wanted to get an update from you guys on capital markets activity, given things that have gone on in the auto space. I want to get a sense for what credit markets are doing. Are they really differentiating between quality operators and whatnot, and the investor appetite in the fixed income market?

Speaker 1

Sure. Yeah. Happy to take that one. It's generally been a fairly favorable environment for ABS issuers this year. I say ABS issuers, those of our peers, including ourselves in the subprime auto ABS market, where aside really from a couple of weeks around Liberation Day where everything kind of froze, spreads have been pretty tight. I will note that in recent weeks, we have seen some widening in spreads, really on the back of the Treacleur bankruptcy, but that's mostly been deeper in the capital structure than where we issue. We actually have an ABS deal in the market right now. We began marketing this morning, and we're seeing a lot of demand at levels that I think you'll see comparable to our recent deals.

Feel good about our access there, and would just point out as well that we think we're pretty well positioned regardless with the amount of liquidity that we keep on the books. Right now, as of quarter end, we have $1.6 billion of unused availability on our revolving credit facilities.

Speaker 0

Very helpful. Appreciate the update. Thank you.

Speaker 1

Yep.

Speaker 6

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.

Speaker 2

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

Speaker 6

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