Doug Busk - Senior Vice President and Treasurer Brett Roberts - Chief Executive Officer Ken Booth - Chief Financial Officer

John Rowan - Janney John Hecht - Jefferies Moshe Orenbuch - Credit Suisse Leslie Vandegrift - Raymond James David Scharf - JMP Daniel Smith - Peyton Capital Randy Heck - Goodnow Investment

Thank you, Jessie. Good afternoon and welcome to the Credit Acceptance Corporation’s third quarter 2016 earnings call.

As you read our news release posted on the Investor Relations section of our web site at creditacceptance.com and as you listen to this conference call, please recognize that both contain forward-looking statements within the meaning of federal securities law. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control and which could cause actual results to differ materially from such statements.

These risks and uncertainties include those spelled out in the cautionary statement regarding forward-looking information, included in the news release. Consider all forward-looking statements in-light of those and other risks and uncertainties.

Additionally, I should mention that to comply with the SEC's Regulation G, please refer to the financial results section of our news release, which provides tables showing how non-GAAP measures reconcile to GAAP measures. At this time, Brett Roberts, our Chief Executive Officer; Ken Booth, our Chief Financial Officer; and I will take your questions.

Good afternoon guys. I just want to make sure I understand your commentary here around unit volume growth, obviously it peaked in September of 2015 at 41%, the unit volume growth has come down and is now 12% for the quarter in the third quarter 2016, but in the subsequent paragraph you say that it declined 8.3%, I just want to make sure, the unit volume is down 8.3% and not growth has come down to 8.3%, am I reading that correctly?

That’s correct. So, year-over-year unit volumes were 8.3% less than October than in the same period of the prior year.

Okay. And then later on in the paragraph, you talk about forecasted collection rates coming down, and that you believe that the reduction in forecasted collections has impacted the unit volumes for the year, could you discuss that a little bit, I mean are we at a point where forecasted collections are starting to really hurt dealer holdback payments, I mean, and that could be what’s causing some tapered united volume numbers for you?

No, I don’t think that’s what we are saying. I think we are just saying, we’ve seen the trends of loan performance throughout the last four quarters, we’ve rafted at those trends.

The amount that we pay the dealers at loan inception is a function of the collections that we expect. So, if we expect lower collection levels than we’re going to pay the dealers less money and that’s what impacts loan volume in our opinion.

Okay. It doesn’t look like you guys purchased - repurchased any stock during the quarter, correct?

Correct.

Correct.

Okay. Is that just a function, I haven’t looked through the Q yet, is that a function not having an authorization or liquidity?

Do you think you will get back in the markets to repurchase stock?

We continue to approach at the same way. The first thing we look at is, do we have excess capital and if we do then board makes a decision when it’s appropriate to buy it back, so we will continue to use the same criteria and over time you can probably expect we will be repurchase more shares.

Okay. And then just last question, obviously asking about the provision expense, you know in the past we've talked about it whether or not it’s the counting or is it in the portfolio or to whether or not it seems like that is actual pressure in the underlying fundamentals of the auto loan book can you just give us an idea of how we look at the provision expense of $22.8 million this quarter?

As we've said before, we really focused on the adjusted results. We don't really look at the provision internally.

We have GAAP statements that we prepare and we release and you’re welcome to look at those, but internally we focus on the adjusted results for the reasons we talked about in prior calls.

Alright, thank you.

Good afternoon guys, thanks much. Just going a little bit back to the volumes, the volumes down, unit volume is down in October, can you tell us what is going on with the loan volume kind of as we go through the fourth quarter and maybe you could even flavor in some of your thoughts on the competitive environment and what that might mean to loan volume in the quarter?

Well it’s November 1 and we gave you volumes through yesterday, so that is about as close as we can get now.

Yes, but unit volume, but your average loan size has gone up fairly a lot over the past years, so that can offset the unit declines. I'm wondering if you could give us a little bit more color about the total volumes including the average size.

We don't, we don't have dollar volume at this point. We just have unit volume.

I mean you are right, the dollar volume has grown more significantly than unit volumes in the last two quarters for sure.

Okay, and so maybe we can talk about that a little bit then, I have seen your purchase loan business is growing at much greater rate than the dealership business, maybe you could talk about is that influenced by something internal, is that influenced by the competitive environment, how should we see the balance of that play out going forward?

I think the primary driver that you see throughout the release is we continue to be in a difficult competitive environment, it’s one that’s been in place for quite some period of time. Our strategy in prior cycles like this has been to grow the number of active dealers.

It is pretty hard to grow volume per dealer in the environment that’s as competitive as it is today and we've had some success with that strategy in the past and I think what we allude to in the release that strategy gets more difficult as the number of active dealers grows it becomes tougher to grow that active dealer base at the same rate. And so we are starting to run into a situation where our existing sales force is signing up as many dealers as they are capable, but it’s not enough to offset attrition and the impact of the competitive environment on volume per dealer, and still leave us with rapid growth.

So, I think that is where we are today. The first loan program has helped.

That - as we’ve talked about is a separate channel for us. We’ve had probably more success in growing that segment of the business than we thought we would and so that certainly helped and as the prior caller mentioned, the average size of the contract is up as well.

So, you have some dollar volume growth, but ultimately if you want to be a lot larger company than we are today, we have to figure out how to grow unit volume and that’s certainly the challenging in the existing competitive environment.

Okay and then when it comes, is there any way you can give us sort of characterize maybe the terms in that purchase model, is it, what is the average loan maybe yield and size and duration or anything like that to just help us kind of forecast for what that might look like going forward?

We don't have - I'm not going to give any additional numbers other than what’s in the queue and the release, there is quite a bit information, particularly in the queue on average loan size, average advances et cetera. The purchase loans are larger, they are longer term.

They are obviously - we acquired those in a different way. We give the dealer one payment upfront and so the dealer holdback payments at the end, but other than that they have similar characteristics that are a little bit lower yield, little bit larger size, but we're happy with the profitability of loans that are right now.

And then last question, do buy those similar to the dealer loans, do you buy the purchase loans at a net discount on average?

Yes.

Yes.

All right. Thank you guys very much.

And so we have information in the press release and the Q that shows what percent of the underlying consumer loan principal plus interest we are acquiring those at.

All right, thanks very much.

Great, thanks. Just stay on that purchase program, I mean you buy them at a discount to the principal plus interest, but what price do you buy them relative to the actual principal amounts.

Again there’s lot information in the Q and in the release on advance rates and the average size of the purchase loans, it’s been how much we give the dealers relative to the expected cash flows, I would point you to the information that’s been already disclosed.

I guess the question that I’m kind of struggling with is, to the extent that the purchase program becomes a larger piece of the total company, what point does the level yield accounting no longer seem appropriate or at least appropriate for that piece of the business?

I don't follow you.

Why would purchase loans [indiscernible] accounting.

In other words, purchase loans I mean are similar to the way other finance companies conduct their business and they record those loans at the purchase price and then they kind of accrue losses based upon a loan loss reserve methodology, it’s a different accounting methodology. I guess, when this was under 10% of the company, it’s, I guess I kind of struggle because it’s pretty hard for us to follow the quality of that underlying business because you don't have the protections that you have in the portfolio program?

Let me just answer this way. The accounting we follow is the required accounting.

I can tell you that when we adopted the accounting, they didn't say well purchase loans are small so you account from anyway you want to. They looked at our accounting treatment for both dealer loans and purchase loans and the accounting treatment that we follow, as well as prescribed at the time for both of those.

So, they both are auditors and the SEC when they looked at it they both agreed that the accounting we use is the accounting we should be using.

Okay. All right thank you.

Good afternoon. Hi.

First question, we talked about this last quarter a bit, on the forecasted collections for earlier in 2016. They changed positively a little bit this quarter, although not as much as first quarter to second quarter.

And was curious if we had some more information now that it was a little bit of time between now and then, on that first quarter 2016 pool right up that we had just a one quarter change and so a little bit this quarter as well?

They continue to perform a little bit better than we expected in originations. So, when you update the actual performance experience that you’ve incurred to date into your forecasting models that results in a little bit of improvement in the all-in forecasted collection rate.

So, it’s just reflecting the better experience we’ve seen thus far.

So the ones that were originated earlier in the year, you are actually seeing cash collection above what you originally expected on that or at least earlier?

Yes.

Okay. And then on, when we talk about, you guys have already talked about the purchase volume, but kind of on the recovery value side, I know you look at your own portfolios rather than an entity and was curious what your take right now is and for the next few months going forward on how you just feel about when you repo the recovery volume for the cars you are seeing, especially since it’s on the older used vehicle side on these terms?

There’s obviously been a lot written about projections and what used vehicle values are going to do in the future. We are certainly aware of all that.

We track all the vehicles in our portfolio and the change in the black book value every month, obviously it is the used vehicle, so it is a depreciating asset, so it goes down every month. What we have seen so far this year is the steeper decline in terms of the depreciation on the vehicles in our portfolio than we’ve typically seen, probably the steepest declines this year going back to, I think 2008 was the last time we saw depreciation in the steep.

So that’s certainly impacting the loan performance to date, and it’s something that we've included in our forecast. As we talked about last time, we don't - the actual amount that we received at auction from the repossessed vehicle isn't a huge position percentage for total expected cash flow.

So, we don't necessarily have a prediction of what those used vehicle values are going to do in the future, it’s not as important to us as it is to potentially other more traditional lenders. You write a loan today, it is a 50 month loan trying to predict what used vehicle values are going to be over the next 50 months is obviously very difficult.

So instead, what we do is we try to build a margin of safety into our business model, so that we know that predicting collection rates is very difficult, so we try to accept the situation where even if our collection forecast common in a little shy of what we expect, the loans will still be very profitable. And that strategy has worked for us very well over time.

Okay. And then on the - just the overall loan portfolio, when you look at not just the undiscounted collection rate that you guys have in there with the forecasted collections, but on the actual net present value of total loan portfolio purchase and portfolio program, how is that looking right now?

I'm sorry, I didn't quite follow that, could you…

The net present value of the loan portfolio, how has that changed since the last quarter?

I think we have a fair value disclosure in the 10-Q that will answer that question.

Okay, sorry didn't have a chance to go through it all right before, and then BSO [ph], but then I guess on the same direction there and I apologize if it’s right beside that chart, the restructurings that you guys have had on the portfolio rather on loans done this year or in 2015 et cetera, the most recent advantages, how much of that have you had to restructure already and people going into extend the term or reduce rate, we've seen a lot of term changes across the industry, so just curious what you guys have seen?

I mean, we don't extend our rewrite contracts except where we are required to by law bankruptcy, FCRA things like that, but we don't, we just don't do that is the answer.

Okay, all right, perfect. And then last question and I apologize if this was asked at the beginning of the call, I got in a two minutes late here, but for the last few months, we have seen the same number of shares registered to sell by the Chairman, now we haven't seen that volume come through and they haven't been sold according to filings, but is there a regulatory reason why he has to register that specific number of shares each quarter, even if he has no intent to sell them?

I know that the Chairman has filed a notice of intent to sell under Rule 144, unfortunately or not intimately familiar with the requirements under that rule, you know whether that’s something that he needs to re-file periodically or just what the details are. I do know that that notice has to be filed for the first sale, but unfortunately can't tell you a lot more than that.

Okay, I understand. Perfect, that's all my questions thank you.

Hi, good afternoon. I have done late as well, so I apologize if these were asked.

One was just a point of clarification, am I correct in assuming that the last couple of quarters, the increase in the average loan size is primarily a mix issue with purchase loans generally being larger or is it actually something else that’s more related to the type of vehicle being bought in the extended term that allows the consumer to afford it on a monthly basis.

I think the average loan size is up slightly in both segments and then the mix accounts for the rest of it.

Got it, got it. And another question and this is more qualitative, but I’m wondering, do you have any insights into just general discussions of dealer health, lately, this is more of an industry macro question for you, if you don’t want to comment that’s fine, but as we read more about used car values, obviously declining, signs that the consumer maybe losing a little bit of steam, as you gage the overall health and profitability of your dealer network, particularly those independence, which are two-thirds or more, any sense that we may see more attrition over the next few quarters as some of the dealers run into more profit constraints, or is it too early to tell?

No, I do think that’s a question I have much insight on.

You don't. Got it.

And then lastly, we obviously have the unit volume metrics and the commentary, in October I’m curious, what about overall application volume, meaning are you seeing a change in the - is the decline in applications being submitted commensurate with the increases and decreases in October of the actual unit volumes you’re closing or are you finding that you’re approval rates are changing?

Speaking just for October, the application volumes grew, but not as quickly as it had prior, but I think it’s more a function of the number of applications that we're converting into deals.

Okay. So, you’re underwriting is conforming to the environment and tightening a bit in October.

Got it, thank you very much.

Hi guys, I wanted to clarify your most recent collection estimates, do they incorporate the higher rate of depreciation that you called out in collateral values?

Yes.

Okay, thank you.

Thanks. First just want to say, very nice quarter, pretty much say every quarter.

First question I have is, the ABS deal you guys announced last week, what was - the all-in-cost was, I don't know what it was 3%, I guess if there is a three tranches, but how does the cost of that compared to resent - the prior one that you did earlier this year or last year, is it comparable?

It was, the all in the rate including issuance fees was 2.9%. That was about 30 basis points last less than the deal we did in May of this year.

Less, okay. Because I thought the cost of capital has been going up, so this was even lower.

Okay.

There was period earlier in the year when rates have gotten wider, but in recent months the opposite has occurred.

Okay. And then there are a couple of questions earlier about purchase loans versus dealer loans and not quite sure what the confusion was about, but it says in right here on the press release your advance rate for purchase loans was roughly $0.49 a dollar versus your dealer loans at $0.42 a dollar, and correct me if I'm wrong, but the only difference is, or the major difference is purchase loans, you just not - you don't have to share the backend with the dealers, so therefore you pay more upfront, but you get to keep everything you collect?

Correct.

Is that essentially correct? And perhaps, Brett or Doug you can share with us why some dealers prefer a purchase loan where they probably in the end getting lower economics on a dealer loan, other things been equal.

Why did they choose to sell [indiscernible]?

Sure. I think the primary reason and the reason we identified as the separate channel is there are dealers out there who are not interested in our traditional program.

They want all their money upfront. Typically, large dealer groups some of the largest dealers in the country.

Typically what happens is you run into the process and the dealership that just don't allow our traditional program to work. Sometimes it’s accounting-related, if they are public, publicly traded, they don't want to deal with the contingent payment at the end.

Other times it’s just the process that a large dealership or the commission is structured the way they pay their salespeople was an obstacle. Over the years, we’ve tried to overcome those obstacles and stick with the traditional portfolio program.

In more recent times, we’ve decided to say, okay what the dealer doesn't line our traditional program, is there still a way we can get some business done with the dealership, and so that really was the genesis of the purchase program. And what we have found out there is, there is a pretty large group of dealers, primarily franchise dealers, primarily larger franchise dealers that are interested in our purchase program and like I said earlier, we just had a lot more success with it this year and latter part of last year then we would have expected.

Okay. And how many years have you been doing these purchase loans?

And we’ve been doing them for over 10 years.

And it’s gone pretty well so far, is that a fair conclusion?

I think it’s gone pretty well and we like our traditional program. We like the alignment of interest.

We like to share in the proceeds from the loan with the dealer. We think that creates a good relationship and aligns everyone’s motivation.

So, we really like that program, but we have to be realistic as well. I mean we haven’t fell a brow [ph] on that program right now, that shows up on the numbers.

The purchase program, it is a different program for us, we have been doing it a long time, it’s been at times a significant portion of our business and in other times, a lower portion. We love to be able to grow both programs, but right now the purchase loan program is the one that we’re having more success with.

Okay. All right.

Thanks so much.

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 mail box at [email protected].

We look forward to talking to you again next quarter. Thank you.