Q1 2020 Earnings Call
At this time I would like to turn the call over to credit acceptance senior Vice President Treasurer Duck basket.
[music]. 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 <unk> IR.
Not credit acceptance dot com.
And as you get list of 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, 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.
What are all forward looking statements in light of those and other risks and uncertainties.
Additionally, I should mention that to comply with the Fccs regulation G.
Please refer to the financial result section of our news release, which provides tables showing how non-GAAP measures reconciled to GAAP measures.
This time, Brett Roberts, our Chief Executive Officer.
Can boost our chief financial Officer, and I will take your questions.
[music].
As a reminder, ladies and gentlemen, if you'd like to ask a question. Please press Star then one on your touched on telephone to withdraw your question from the Q. Please press the pound key.
Please stand by what we compiled the Q1 day roster.
My first question comes from Moshe Orenbuch with Credit Suisse. Your line is now open.
Great Jack 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.
When do you agree up to 10-Q.
[music].
You know when you've got your delinquency numbers I.
I guess you know.
[music].
How should we be taking those into account as we think about your provisioning practices say you know in subject quarters.
[music], but I think the best thing to do in terms of ball understanding or provisioning is to look at our our forecast a future cash flows in our forecasted collection rate.
We think that's that information.
Is the most useful relative to assessing credit quality.
And you know relative to understand the trade distant future cash flows.
[music].
Right, although it's not really helpful in forecasting that loan loss provision right.
It works, it's certainly not the only factor that's it.
I think if we have.
Any shareholders that are still focused on the provision they 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.
On the credit, making investment decision and there's no provision in the adjusted result.
Gotcha Okay.
And in terms of the.
In terms of the issue the.
Your your forecasted cash flows I mean, you talked about kind of reducing your expectations by about 2% or no in the neighborhood that $200 million.
Can you talk about what you've assumed there you know in other words, what's going on with respect to.
Your borrowers were currently receiving stimulus what you've assumed about what happens when that.
Yes, no longer in places like how should we think about that part.
Right. So as we described over at least there's really two components to the net cash flow change in the quarter.
It's about 44 million, which is just the mechanical forecasting model responding to what happened so far in Q1.
And then there was a the remainder but 162 million as a subjective adjustment eight on top of that to consider the ongoing impact of other covert pandemic.
If you look at the release.
Oh, we provided some numbers on a front end collections and total collections.
The year over year change.
Oh, that's probably really the best place to look in the release for what's actually happens so far.
There's two tables there one is just.
Oh, the way the calendar falls on the other one we adjust for different we adjust for the calendar to make it more comparable if you look at the second table, what you'd see as we saw pretty sharp falloff in front end collections and 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.
How do we how do we adjust that where the size of.
Portfolio assumed that we should think about that as a percentage of loans right not as absolutely.
The in terms of the forecast change.
No no. Your <unk>, that's just a rate of change in the dollars collected right year over year that that's not relative to your expectations. That's just what what was it into 2019 and what isn't Twentytwenty right. Yeah, just a simple way to look at it.
Okay.
A reasonable assumption would be if the if you didn't see a change in the collections than probably know forecast adjustment would be necessary.
Since in we did see a change in collections in March and April or 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.
Right I guess, then I'll ask the question asked before about those May numbers, you basically collected Eaton half percent more on on the front end and 4.9 in total.
That is written with that has helped as you point out of that you know correctly pointed out here, but that's helped by the current situation what can you talk about.
It just because you're right down to 2% just that assumed at that.
Doesn't doesn't deteriorate at all I guess is that that's what I'm.
No I read the the 40 to 44 million that based on what happened. So far the 106 until 9 million assumes that there'll be some continuing impact in the future.
And can you talk about how much like how you came out.
That that forecast.
I don't really want to get another component to it I think you're looking at a highly complex situation I think we say in the release that.
Given the number of variables.
Tire too.
Have a great degree of confidence in any number that you have put forth Oh, we took our best shot at at the 162 million is our best estimate we do say its objective.
I'll just have to see how this pandemic transpires, how the economy transpires you know how vehicle values. We respond there's obviously a lot of variables to try to get your I'm sure.
Gotcha, and 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, I think people with employment or the people, who receiving stimulus checks and unemployment checks and that's the most checks that unemployment checks. So would you would you, but you know underwriting a borrower is being paid by the got Justin.
The vast majority the borrowers are our or are employed at a time alone has made.
Okay. Thanks.
Thank you in the next question comes from John Rowan with Janney. Your line is now open.
Hey, guys.
So it's winners and with the reduction in repossessions, that's a function of forbearance or is that a function of social distancing and various state.
Restrictions.
There's a few states that have restrictions and where obviously following all those restrictions, but that was that that was a a a decision that we made to stop repossessions early on.
And the crisis.
Okay. So the vast majority of that would be.
Actually you guys, giving out forbearance for consumers.
Well, we made a decision not to repossess.
Okay.
Do you still have a six month net income covenant ER positive net income covenant I believe it might have been on the revolver at some point.
Oh, yes, we still have that covenant.
Okay. So that would mean that next quarter, you would need to pose an earnings.
Larger than or.
Equal to the net loss this quarter not to break that covenant correct.
Yeah, you need to make some adjustments to the first quarter loss for items that aren't counted there, but yeah. The ideas 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.
I'm just looking at the 10-Q I'm sure we sure I'm counting your card it seems like your three new issues as far as legal disclosures.
New York Subpoena, it seems like you've gone back and forth with a new see I'd from the CFPB and then also something in Maryland, My reading that correctly are those older issues that you are you know just updating.
Certainly, Maryland, and the CFP B.
Oh excuse me are newer issues.
Do you work I think existed prior to this quarter. Okay. And then just lastly, you know we've heard from some lenders that you know when they when they set their loss expectations in their provision and allowance.
They were using the March 31st economic forecasts a lot of people excited we're using Moody's forecast of 9% unemployment I just want to see me are you guys had a hard cut off at March 31st or you're treating the post quarter end issue is the subsequent to that and also including that in your loss estimate.
And your provision expense your for the quarter.
We're basically including everything we know a up until we release compiled the Q.
Okay alright, thank you.
Thank you and the next question comes from Vincent Caintic with Stephens. Your line is now open.
Hey, Thanks, good afternoon, and thanks for taking my questions.
So first one I think.
Something that I've got a question from on investors is just one I think about your funding and some of the the covenants to the funding I'm. Just wondering if you could talk about if there's any issues there because theres been some discussion about.
That maybe with forecasted questions coming down that could that could drive some triggers to your securitizations.
Any any thoughts there any concerns there.
Yep.
You know two sets of covenants 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, the ses and the amortization period to commence early.
So that's one set of considerations and then the other is a termination of that's one basically the whole deal would be.
Default.
The.
Early amortization events are set at a.
Higher level than the termination of that so in other words more degradation would have to occur for a termination of bad to occur as suppose to an early amortization to that number.
The most relevant early amortization of bad currently.
As one which would cause the revolving period to cease yes.
Cumulative actual collections.
Our less than 90% of cumulative forecasted collections.
And that's based on a cash flow stream delivered a closing if it were less than 90% for three consecutive.
Once.
At this point, we've accumulated a nice.
Simulative cushion on all of our Securitizations.
So don't we don't.
Anticipate any near term difficulties.
Avoiding an early amortization that.
Oh that obviously could change in the future depending on the severity and duration of though.
Pandemic crisis.
Okay. That's very helpful and is that 10% comparable to the so you're forecasting collection rate was only down.
2.3%, which I think is pretty impressive is that the.
The best comp against a 10% that you mentioned on the.
Early amortization event.
When you got to consider.
Both.
The amount and timing.
It's it's Directionally goes the same way, but it's not exact.
Okay. That's very helpful. Thank you.
Question on.
On the competitive environment.
So understanding that your your volumes are down.
Unit volumes seem to be down more than dollar volume. So just wondering if youre seeing in this environment maybe.
So if some of the loans, you're placing in April and May our higher quality than you would've gotten.
In the past because if I remember correctly back in 2011 your spreads.
Quality was good coming off with the last recession. So just trying to understand what maybe you're seeing now that maybe that the bottom of this has been reached.
I think in terms of volume what you saw in the first quarter as we were.
We were flat through February.
March was down 20 plus percent.
As the pandemic started to impact.
Our dealerships.
April is down about the same although the last part April was a lot stronger than the first part and so far and May were up.
20 plus percent.
In terms of the quality I think it's too early to say what happened.
You know it.
At the end of the financial crisis kind of 2008 2009.
Was the loans performed better than you would have expected Ed you just look that what we knew at loan origination.
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.
Because there's a lot of lenders competing for those loans until we get adversely selected.
As competition Thins out you see the opposite impact I think that's that's one reason why the o. eight or nine vintages performed so well. The second reason is that when competition thins out it's very hard for borrowers in our market to get alone.
And they know that they they valued alone 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 it getting another alone.
If they don't pay for this one would be difficult so whether we'll see those two things play out this time or not it's just too early to say.
Okay very helpful.
And then last question for me. So there is some concerns about the.
The the auctions being close does not have much of it impacts your forecasted collections going forward. Thank you.
I'm, sorry, what and I didn't catch the question here just.
Sorry CRT.
Option, you had auctions being closed does that have a material impact on your.
Collections your overall collections.
Right now we're not Repossessing cars, we had an inventory that was at the auction when the crisis started but a lot of the auctions are actually open.
They're selling they're doing virtual sales.
So we were able to liquidate some of the inventory that we had at the start of the crisis, we aren't adding to it now so.
So it really isn't an issue, but you'll see a timing difference you can you can see that in the tables that we put in the release.
Because we don't we're not repossessing cars, and we're not seeing those option proceeds at their usual level.
Total collections have fallen more than front end collections, but we provided all those numbers when we start repossessing vehicles again, you'll see some of that flip around.
The other issue have there is the values that you're getting at auction aren't what they were before the crisis.
One of the big variables that will determine what the actual.
Collections are as you know how long will it take for those values to rebound and to what extent will that occur.
Okay. That's very helpful. Thank you very much.
Thank you. Our next question comes or Randy Heck with good now investment your line is now open.
Okay.
Person, Brett and the team first of all I want to say.
This quarter was.
Pretty damn good relative to what I would have expected or probably anyone as it would have expected in terms of collections. Most importantly collections, but also originations so.
First question is.
The.
The may the New chart you haven't there for.
Oh the person.
[noise] [noise] [noise] so what.
Well.
Okay matching the back end of May backend collections were up 7.3 is I mean that you're.
Some cars.
Yes.
I didn't hear all that Randy, but I think I heard and relevant to try to give you any.
Collections better in May than they were in January and February.
I think a couple of things being people got behind.
In March and April and then I think you have to assume that the stimulus money that people are received you know it.
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'd take whether I think.
May collections will be growing faster than they were in January and February I would it's had no that's not that could never happens I do think you're right that.
So far what's transpired is.
Far far from a worst case scenario.
Okay.
And then the volumes I thought.
In early February.
Flattish.
Again.
Well that reflected the old competitive environment.
Hey, being up 22% does that reflect any changes in your pricing.
Whether it's you you loose in pricing or did you do the opposite.
Fair enough to get at a price in discussions, but the as we said in the release related that the two reasons why we believe that may volumes are are better than the prior months. One as you started to see dealers open back up again.
That's not going to lead obviously, two a year over year increase because there are open last year I do think the stimulus.
Money that's out there had an effect.
And our market.
And.
Certainly possible we don't know this at this point that the competitive environment has improved.
Okay.
Lastly, I had was.
The estimated negative cash flow impact from the quarter.
Normally when you.
When you have negative or very.
No and pools you.
Do you estimate that number the number of sorry, the negative cash flow effect.
But the balance of the your best estimate that point in time sort of let alone the remaining life of alone.
So that's the $45 million that's you noted.
130 million, just so I understand that that's over and above what you would normally.
The.
Suggesting it's going to be the the hit over the life of the alone but for the entire portfolio for the balance of the life of the portfolio is that correct.
Yeah, let's say a little bit differently. So the 44.3 million. That's that's the model responding to what occurred in March. So we had obviously lower collections in March.
Second half a march in particular people weren't making their payments. So the model looks at then says okay. The customer Miss their payment so I'm going to look at all in all the.
The historical data that looks like that customer that missed their payment and it's going to.
Reduce the estimated cash flows for that.
For the life of that loan.
So.
Just the model responding to what happened already in March but the model doesn't.
Necessarily know about cobot 19, it doesn't look out and say well that not only did that customer missed 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 pan.
Nick So that's what the 162 million if.
Okay.
If you look back in 2008, we made a similar series of adjustments I think one in the second quarter of all eight one in the fourth quarter, although overweight.
About the same magnitude if you add the two numbers together in the in the low 2%.
Yeah in those adjustments, we made in 2008 turned out to be appropriate.
They weren't they were.
If you look back on it there are pretty accurate.
Not to say the the one we made.
This quarter will be accurate I think it's too it's too early to tell.
But we certainly 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 will there's just too many uncertainties to have a lot of confidence that the 162 is the exact right number.
Okay.
So essentially.
Let's turn to.
Plus 44 were talking $15 a share.
More or less.
Its a.
That's the cost of the crisis was not an ongoing costs, but it's the cost of the crisis and.
Going forward, it's being equal if history is any.
Yes, if we can report.
It's really a competitive environment, it's gonna be substantially better.
For some period.
And then.
Last one I want to make was so.
Yeah.
Right a beautiful.
Letter to shareholders.
That's the best anybody that.
[laughter] just read.
And a lot of your quick questions being asked on the call.
The answer.
Thank you.
Thanks Randy.
Thank you. Our next question comes from John Hecht with Jefferies. Your line is now open.
Hi, Thanks very much for answer my question guys. Good afternoon. So.
So I just wanted to make sure I understand the difference now between the gap and then adjusted earnings than what we've always been accustomed to the floating yield adjustment.
But effectively or what you're doing now we want it just to make sure I've got my God Ducks in order to I add back.
And then to the extent you're going to make adjustments in your cash flow collections I would affect yield on a going forward basis.
Yeah, and effect take yields down a little bit Ford because of the loss of your expected cash was or is that a fear is that the right kind of form you got to deploy this.
[noise], yes, I mean that 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 disclose that are in 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 GAAP results to understand the economics of the business I think it's very very challenging to try to do that.
Okay and that's helpful. Thank you and then.
Did you guys goes or do you have <unk>, when you're going to get back in the market for repossessions.
Second is how much of your overall cash flows are relies upon repossession like activity.
Yeah, we haven't made any announcement in terms of.
How we plan to pursue repossessions in the future.
That that in terms of percentage of our total cash flows.
Somewhere around six 7% as repossession proceeds.
Okay and.
And then then I'm wondering I mean, it's pretty impressive but you guys. You likely went from a largely intact call center focused section two I imagine that large degree of work at home collections is.
You mean, if we're collections was <unk> productivity impact at all maybe you could just give us some commentary about the adjustment to.
Yes.
Just didn't collections versus all in was centered how you guys adjusted so rapidly.
Yeah, I would say overall im extremely pleased with that transition.
The team was able to react very early.
It went very smoothly and not just in the collections area, but really in every area of the business.
We've got a great culture, we agree people they are adjusting to a.
A different work environment really an extraordinary where it could couldn't be happier worth how all that way.
Okay I appreciate that thank you.
Thank you. Our next question comes from Argenta Taser with John Lusky Fraser. Your line is now open.
Hey, Brad.
First of all congratulations on getting featured on Lawton scanning and books do your shareholder.
He talks about all the C used to be Troy. Good shareholder to then you metered there. So I think it's somebody deserved congrats on but.
Thank you.
And so my question is about your latest 200, Elector which came out HM.
Earlier this month.
Not compare to your 2007, lichter, which came out in March 2000 did it seems you want a bit more cautious this time around.
You talk about you know 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 and you have to those in nuclear chart. So can you had been understanding the difference the you are seeing it.
Yes.
Yeah, I don't know I'd have to go back and.
In a read the prior letter I don't know up by more or less optimistic, but we have.
You know we're in the early innings of what is a very significant challenge.
So far I think you can be there's certainly room for optimism when you look through a the results from the first quarter, but you have to remember it's very very early this is something that is.
Without precedent we.
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's at Pratt is an accurate reflection of how I feel.
Okay, Okay, but do you see say unemployment going up one thing you know unemployment went up into those Andy. It has been would this jump makes you more cautious than last time I'm just because the number is higher as it stands right now.
Yeah, I think so I think you know what that that crisis played out over a longer period of time.
You had more time to react to what you're seeing.
This crisis is much different not only is the is the.
The magnitude a much greater but the time period has been greatly compressed.
So again, it's not I.
I don't think Theres a historical period, you can look at and say, yes, it's going to play out exactly late at historical period. The financial crisis is that as close as you get but.
I don't think its.
Comparable enough to make me feel like caution isn't warranted.
Okay. Okay. Thanks.
Thank you. Our next question comes from Sanjay Sen with Bloomberg. Your line is now open.
Guys.
And just couple of questions Yeah, Brett I know you said you want to talk about pricing for you in specific but if you. If you could say anything at all about what you're seeing in the marketplace.
Regarding pricing would be interesting.
And then I had a bit of a housekeeping question.
Doug there on the question on covenants and the revolver and net income and.
I just want to know I think a couple of quarters ago, you'd you'd mentioned how lenders are using your adjusted net income numbers and I think Doug lose out there so.
Does.
What we see the positive adjusted net income this quarter is that really what what they're going to using that for you know well on site, if any covenant issues with revolvers. So.
Yes.
We have anymore might go ahead go ahead, Doug No you go ahead.
And I really haven't insight into how others are approaching their business higher pricing perspective, it's just too early.
There's a lot going on customers have money because of the stimulus. He had a period, where the dealerships were closely 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 and as punished don't have enough information to be able to give you much color on that sure.
Relative to the adjusted numbers the adjusted numbers.
Our used.
To determine the value of the loan asset.
For our borrowing bases on our revolving credit facilities.
They are not the basis for all the covenant the John Rowan required about earlier.
Our of minimum net income for two consecutive quarters, so, but that's not the way that that a covenant is calculated.
Got you alright, thank you.
Thank you. Our next question comes and Rob Wild Hack with Autonomous Research. Your line is now open.
Hey, guys question on a borrower health and unemployment specifically you know.
We've gone through previous downturns, you'd have borrowers who could find work just made the ideal level or at lower levels. At this time you have it a different situation you know not only is unemployment significantly higher but you're gonna have people, who are reluctant to turn to work or returned to work for safety reasons. You know you can have industries totally changing them.
Are they operate how do you think about those things in this new environment in factor that in when you're forecasting collections.
Yeah, I think your your description of what's going to happen in the future is certainly one opinion, you say it with a lot more certainty than than any opinion I would have on that I don't really know how the academy is going to unfold.
I don't even know how the how the health aspect of this crisis has got to unfold. So.
So I think it's very difficult to pick a specific scenario and say what are you thinking that scenario. It's just you're 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. This is one of those situations, where we're going to have to see how this unfolds over time.
And as the impact of evolves, our forecast will get more precise and we'll be able to look back on it and say it does this this is the impact but I think it's just too early to say that at this point.
Okay.
And then again trying to give them the same thing a different way in as anymore color you can give us on.
How we can come up you know what you're seeing today quantitatively qualitatively in the economy I mean, your borrowing base that they can translate to you know the adjustments you've made to your collections.
Yeah. It had helped asset a different way I didnt quite file.
Okay, we can call up offline. Thanks.
Thank you. Our next question comes from Benjamin Wanger with three segment value. Your line is now open.
Hi, I'm I'm looking at your board of directors on your website and it's comprised of four members I see Brett the C. O. 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.
Which is a NASDAQ listed company what are the requirements for the independence of the board of directors and specifically for an audit Committee.
You'd have to look that up on the NASDAQ website at <unk> I don't know what that is off the top of my head.
I'm sure that we comply.
Sure that you can play, but do you have anywhere else on the on the line here, who can confirm what the requirements are for independence is no. That's not I mean <unk> call your lawyer.
Is your lawyer on this on there nobody knows.
You're asking me a legal opinion I mean could go look it up I'm sure we comply.
Thanks.
That's all I have.
Thank you. Our next question comes a Giuliano <unk> BTI G. Your line is now open.
Good afternoon, and thanks for taking my questions.
I guess, starting off well things I think would be interested to get some perspective on.
One of the other tests and with your bond indentures as your fixed charge coverage ratio, which has impacted more so on a cumulative basis looking back on and on a 12 month basis, but it really is measured with an EBITDA metric that's on really on a GAAP basis. If you saw another revision similar to the await 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.
Oh, you're referring to our senior notes.
That's correct.
Yeah, I mean, the covenants in the senior notes are based on.
Or based on the accounting that was in effect that the at the time of issue once off for the first one.
Well for both of them. So the operative gap there is the gap.
We were operating under last year.
That makes sense.
I guess well things have been changing a little bit of perspective on when we look at the securitization transactions one of the levers that you do have as it did you have the ability to over collateralized certain transactions and effectively pushed more assets into certain transactions.
Have you started doing that many of the transactions with this one.
Well, we we've done that on a limited basis.
That makes sense.
In the.
Then I guess I was slightly different <unk>, having another different to appoint.
The you have that table that weve Moshe it was referring to around your collection rates.
One other things I'm trying to get a little bit perspective on there. It looks like your average loan balances I kind of run more of an average balances up 11% to 12%.
In the first quarter versus this year versus the first quarter last year, and then you have that kind of adjustment that I.
I guess level wise is it but doesn't seem to kind of foot directly to the 12% number and I'm, assuming that's more so related to.
Strong originations and.
The may timeframe, but.
If if we think about those numbers yes.
With that mind it looks like.
4.9% up is no net.
It may not maybe down if your loan sizes up 12% or so in that ballpark.
And then kind of as a second point if if if I then look at a lot of the unemployment collections and the stimulus checks most of that came in April and you had some very large catch up payments for allowed the deferred and delayed unemployment checks.
Do you think that had more of an impact in terms of getting delinquent borrowers to temporarily we perform or was it more they.
Was it what were the impact different in terms of your ability to get better credit performance.
Yes, I think it's very difficult to say I mean, we had you 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 enhance the unemployment.
And.
As a result of all those factors, we saw rebound and collections in the last half of April and in May.
<unk>.
But it doesn't make sense then the only other thing is.
Thinking about originations is there any perspective on where you how you want to manage originations going forward then and the main reason why I started that if you continue up 20% versus last year.
Just the allowances alone could significantly impair your earning stream and and kind of get you closer to that fixed charges covenant in my model at least obviously not your numbers, but I'd be interested kind of thing you know how you think about <unk>.
Those types of into action would you go out and trying to.
This is our consent to change any covenants.
I think I'll hear what have you know.
Yeah, we don't we don't want to.
Have the accounting dictate how we run the business I'm you know we want to run the business you know looking at the economics of the business.
So yes.
You know running the business the right way.
I would cause us to.
Oh potentially encounter a covenant issue.
In our revolving credit facilities.
Then we'd prefer to run the <unk> the business the plate way and have a conversation with our lenders explaining why that's the prudent thing to do.
That makes sense, that's very helpful. I appreciate that and Ah. Thank you for answering my questions.
Thank you. Our next question comes from Thomas said with Goldentree. Your line is now open.
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.
Well certainly.
I mean, one thing isn't though in the you know several states that do have restrictions you know you obviously want to [noise].
Oh, you don't make sure that those restrictions are lifted you know I think the rest of that decision as a you know judgment call, but you know will make internally and you know we'll look at thought you know degree to which the.
No economy is open and people are employed in specific areas and you know try to make a subjective decision that as well both you know right for ourselves and right from the borrowers there's no no scientific formula that would tell you know precisely when you ought to start Repossessing and I don't think.
One approach works for everywhere.
We're in.
Would you go state by state.
I think it's really it's a customer by customer decision I mean, it it's not in a lot of ways, it's not much not really different than what we have done historically.
You're trying to work out 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 cost versus unable to pay for the vehicle.
At a certain point in time, you have to make the decision to read the repossess.
The state by State certainly comes in if there's specific orders in a given state.
We obviously would follow those orders.
Got it thank you.
Thank you. My next question comes from David Scharf JMP Securities. Your line is now open.
Hi, good afternoon, and thanks for taking my questions.
Most have been answered I was wondering if there was any color you can 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 turn something the equivalent of a take rate.
Obviously, you are on a different origination kinda platform, but.
You had mentioned it maybe a little too early to make any comments or conclusions about whether the competitive environment, maybe easing up.
Do you get a sense whether or not.
In the mail volumes.
Dealers were finding kind of fewer alternative financing options in that competition maybe easy.
Yeah, I mean, you have an anecdotal sense.
But.
Reluctant to comment on the competitive environment until you have data that you can look at.
You have pent up demand do you have stimulus money have dealerships reopening and potentially you have a change in the competitive environment, but it's just too early to to try to say out how much of each impacted the may volumes I guess, even if you concluded the competitive environment and got had gotten easier in may.
You still wouldn't though.
How long that would last so I'm not sure.
It would do you a lot of good.
Got it got yeah, no. Obviously, we're all kinda grasping for early indicators and I guess is just to follow a similar.
Topic.
Is there any.
Anecdotal.
Information to share on.
I guess, the overall health of the dealer network, you know, particularly the independence, maybe the roughly two thirds of the independents are you aware of any.
Christian thus far.
Long independent dealers to the crisis or is it still early in Australia.
Yes, I think it's still too early to say there I'm I'm sure that like every business there.
Or like most businesses I should say there they're under a lot of stress because of the environment that we're in.
Got it okay. Thank you very much at all.
Thank you. Our next question comes from Vincent Caintic with Stephens. Your line is now open.
Hey, thanks for the follow up to.
Two questions first for that six months net income covenant.
Could you, let us know what are the exclusions or what are the takeouts from net income to come to think of it.
I mean, you know basically though the biggest one would be.
Non recurring gains or losses, So you know you've got up.
7 million dollar pretax number.
This quarter.
Others couple other things that are less significant but.
At the end of the day, it's not a based on the current quarter's results.
Those adjustments excuse me aren't real material.
Okay. That's helpful.
Second follow up so I understand that forecast are difficult.
And.
Collections forecast is based.
The margin and Cecil makes things, even more volatile, but march volumes and payment collections were deteriorating when I think about your.
Disclosures you gave with me, it's getting a lot better.
I'm wondering if.
For using the data we're seeing in May could you actually see.
Some of these numbers go into positive direction. Some meeting your force cash collections being better than that 2.3% hit your forecasting currently and then from a seasonal basis, maybe going going the other direction with what's a release.
I mean, you know conceivably I think that you know again, it's just it's just too early to tell a lot of variables out there I'm.
So you know as Brent said I think it's really early we'll just have to have to see I'll go certainly.
Results in the latter part of April and May have been encouraging.
But there are a lot of variables out there sluggish up to see how that plays out.
Okay understood thanks very much.
Thank you. Our next question comes from Harold leave me with M.C.A. Baliotti. Your line is now open.
Hi, guys. Thanks, so much the time, it's not one question on the financials I'm looking at a cash flow statement, a net cash from operating activities is pretty much equivalent to same time last year.
Looking at the balance sheet, it looks like cash cash equivalents I've been drawn down significantly from $187 million to $25 million approximately.
I'm just trying to tie out those those two things and what's caused a significant cash and a decrease in the quarter.
You know I think the current quarter. If you look over long period of time as you know more reflective of a law.
You know how we tend to.
Excuse me on tended to run the business overtime.
We try to operate with less unrestricted cash as opposed to more because of the negative carry and we rely on or.
Revolving credit facilities as our primary source of liquidity.
So I think you know, though the amount we're sitting on cash and cash equivalents last year.
Is unusually high just due to some financing activities that occurred in the latter part of last year.
Got it that makes sense and then on the cash flow statement.
You know just unreadiness incorrectly that's fine but.
The net cash you didn't really impacted but the cash equivalents have gone down so much in the quarter. So.
And I am I missing something there or how does that tie with one another.
I guess I don't really don't really follow the question.
Okay. Yeah, just you guys. It looks like you guys utilize like cash in the quarter freeze for what you just for deployment, which is great and but the net cash slightly increased with the adjustment.
On an unadjusted basis.
A large negative number but with the adjustment to same time last year, it's pretty much the same or slightly higher I'm just struggling to understand.
How so much cash has been utilized effectively yes, I'm sure, but the net cash.
It has increased slightly.
Well you know Weve there were a couple unusual.
One unusual transaction.
That occurred during the quarter and that's we repaid about 400 million Dollarss and long term debt.
We also bat bought back about $300 million and stock during the quarter.
Okay. 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.
Thanks, Hi back kind of Doug.
I noticed there was an increase in the share of.
Next rather towards more purchase originations Im just wondering what the engine.
The cause of that was for the first quarter.
You know no specific reason it could just be that you know 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 that may be the reasonable we don't know that perhaps absolutely certain.
Cool yeah.
It makes some sense, that's what happened and then lastly, I know you mentioned stock repurchases.
And since then.
Yes, yes, if he's on are considered repurchasing some high yield bonds with both of them around nine.
As of yesterday.
Yeah.
Not really.
I'll never say never but I think our off.
Our primary focus is.
You know and investing in new loans and.
You know secondarily buying back stock and you know we think that's the.
That's used to shareholders capital.
Yeah I appreciate the answers thanks guys.
Thank you and as a reminder to ask a question you will need to press Star then one on your Touchstone telephone to withdraw your question from the Q. Please press the pound key our next question comes from John Rowan with Janney. Your line is now open.
Hey, guys. Thanks for the follow up just connecting a couple of things you said Doug.
Why contribute more collateral on as you said on a limited basis. Some facilities. If you weren't close to triggering an early amortization of then as far as I know that is the cure for a shortfall and that 90% collection threshold.
Well you 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 of bad.
Couldn't sure that by contributing additional collateral.
You know you'd have to you know basically proactively contribute excess collateral so securitizations to avoid breaching that trigger in the first place.
So is that why you contributed excess collateral too as you said a limited number of facilities during the quarter.
Yeah, we contributed to the you know more recently issued Securitizations and the reason being is.
They've been outstanding for a shorter period of time and the fed less time to build up a cumulative cushion versus the forecast.
Okay, I mean does that create a liquidity event for you guys. You mean that 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, where how does that and if you.
Fact need to lean back on your revolver for liquidity, if youre, losing advance out of.
The art.
Yes facilities.
I mean, we have over a billion dollars and unused and unencumbered collateral for current time. So you know we're in a very very strong position in terms of excess collateral on all our securitizations or you know performing better than expected at this point.
So the at this point the Securitizations aren't a near term concern.
Very happy with the performance there as you.
Suggested that you know minimum net income.
You know potentially maybe a concern.
And if it is we'll have a conversation with the banks about it.
Okay. Thank you.
Thank you with no further questions in the queue I'd like to turn the conference over to Mr. to bosque for any additional or closing remarks.
We'd like to thank everyone for their support and for joining us on our conference call today.
If you have any additional follow up questions. Please direct them to our Investor relations mailbox at IR at credit acceptance Dot com.
We look forward to talking to you get next quarter. Thank you.
Once again this does conclude todays conference call. We thank you for your participation.
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