Credit Acceptance Corp
NASDAQ:CACC
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Credit Acceptance Corp
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Good day, everyone, and welcome to the Credit Acceptance Corporation's First Quarter 2018 Earnings Call. Today's call is being recorded. A webcast and transcript of today's earnings call will be made available on Credit Acceptance's website.
At this time, I would like to turn the call over to the Credit Acceptance's Senior Vice President and Treasurer, Doug Busk.
Thank you. Good afternoon and welcome to the Credit Acceptance Corporation's first quarter 2018 earnings call. As you read our news release posted on the Investor Relations section of our website 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.
[Operator Instructions] Our first question comes from Moshe Orenbuch from Credit Suisse.
I got a couple of questions, I guess one is just about the purchase program. In the past you guys have said that there are certain requirements for dealers to be in that program. Are those requirements the same because that volume has kind of increased pretty significantly over the last year and half, and kind of continues to increase in that -- most of the past few quarters. So has that changed at all? Is there anything that's different about that?
No, nothing's changed.
Second thing is in terms of the discussion, we talked about this on the last call a little bit, a discussion about CECL, clearly CECL would require you to take purchase credit impaired loans and kind of revalue and then set up a loan loss reserve and all the related disclosures. And you talked about the fact that the impact could be material in the last couple of releases. This time you mentioned possibly going to fair value accounting. Can you maybe talk through the thought process of how the two of those alternatives might work?
Well we are still assessing both alternatives and our objective there would be to end up with accounting that most closely reflects the economic reality of our business if possible. So we're in the process of assessing both of those things. Once we have something material to report we will disclose it in our public filings. If neither of those methods winds up with the underlying economics or business we will continue to include non-GAAP information in our press release to give shareholders better insight into how the business is actually performing.
Right. But I guess my question is you did have that to the discussion, you must have some sense as to how it would present itself relative to your current presentation? We saw that one of your competitors are now to change for at least the next two years, in terms of going to fair value accounting and the impact that had on their earnings. I guess any kind of thoughts you could offer there?
I mean we are really not -- we're obviously working on it. We're working on it hard. But we are not in a position to really disclose anything until we have completed our work and fully understand all the issues.
I hate to keep coming back to this, but it seems to me that if you think about your current accounting method, that your taking into account all of the expected losses I guess it's just not clear why CECL would present a problem. In fact it could -- I guess that's what I'm struggling with. What I'm trying to understand what -- what about it would be problematic that would make you think of doing some other methodology?
I mean maybe we do end up doing CECL work. As we said in the Q, we're assessing both CECL and fair value and we have got something material to report, we will.
Our next question or comment comes from the line of David Scharf from JMP Securities. Your line is now open.
A couple; one is a question on the network size and dealer account growth, which was quite substantial in the quarter. I'm wondering, is there anyway based on the investment in new salespeople over the past year in your history with how long it takes them to become productive in your mind? Is there any sense you can give us for how we should think about the growth in the dealer network this year?
I think it is tough to say, the first quarter was a strong data point, the fourth quarter last year was also a strong data point, so that's two good quarters in a row; we're expanding the sales force in hopes that we would generate more unit volume and so far seems to be working out pretty well but again hard to forecast the future.
Got it. And I know the active dealer metric obviously moves around quarter to quarter based on who actually participated in that quarter. Are you able to provide active and inactive, just the total number of dealers that are participating in your program today and what the percentage growth is versus a year ago this time?
I think the active dealer number we provided probably the most relevant number to look at. Those are obviously the ones that are participating that they are active and as you pointed out it was a very strong quarter for active dealer growth.
Got it. And two other things, one is the average yield on the portfolio. Just as we calculate obviously came down from last quarter and I imagine that's a result of the recalibration the allowances that were taken in the fourth quarter. Based on where your anticipated yields you put stuff in Q1 and just the trends you're expecting in the market this year, should we expect average yield to pretty much remain at Q1 levels for the rest of the year or do you see any downward pressure there?
I mean that depends on lot of things. It depends on -- first and foremost it depends on loan performance and that's a considerable variable. It depends on the pricing we’re able to garner on new originations that will have a big impact as well. So it's tough to -- it's really tough to say there are some big variables there and we disclosed quite a bit information about our yields and the loans we originate in our public filings and that probably ought to give you enough information to make a reasonable estimate.
And then lastly I apologize. I'm going to repeat something Moshe had asked about maybe in a different way. Can you just help me understand how fair value accounting from a revenue recognition standpoint technically differs from level yield accounting that you employ now, because it seems to be very, very similar?
Well, I think in substance there is a difference between the yield or the discount rate you use. One is a -- our current accounting is a function of what we paid for the loan and the amount and the timing of the amounts we expect to collect on the loan. The other discount rate incorporates kind of market elements is determined by conceivably a third party. So you have a big difference just in that alone.
Thank you. Our next question or comment comes from the line of Jack Micenko from SIG. Your line is now open.
You talked about the '15 and '16 vintages, cause you some of the negative development. We saw in the quarter, not surprising given the trend throughout the industry and those over the years. But as those vintages I guess comes to age and then pay off, I think in the '14 it was like 90% paid down. Do you expect increased volatility on the adjustment, meaning as you get closer to final and actual that number swing more have the adjustments you think been adequate along the way just given that vintages of loans has been lower performing than others?
I think the history there is that in the early stages its more volatile and as the loans age it gets less volatile.
And then the New York -- I know you probably can't say much but is that -- is there anything different? You have other states talking about starter interrupts, is that new development consistent with other inquiries that have been related to?
I think it's hard to compare at this point, it's very early. I think what we disclose is really what we know at this point. We had a call. The substance of the call is what's described in the Q and we are waiting for something in writing.
Thank you. Our next question or comment comes from the line of Vincent Caintic from Stephens. Your line is now open.
Just a few questions. On the spreads, I just saw it kind of tick down again, just wondering where you think you can go and what you would be comfortable but relatively with the growth that you get?
So we don't really price to generate a specific spread. As we've talked about in prior calls, the pricing strategy is to try to maximize economic profit. And so we -- set our advance rate so that we -- as much as possible balance profit per unit times the unit volume. So mix of business can determine what the spread is but we really don't have a target there, that we are shooting for.
Okay got it. And I guess from the growth perspective, the [indiscernible] growth prospective, so overall growth is certainly strong this quarter, 18%. I guess if you can give us a flavor of maybe broadly where that's coming from and if anything has changed to drive that? And I guess from maybe the specifically on a dealer perspective anything you're seeing there that's different maybe from the behavior dealers just seems like maybe same-store sales on a dealership part might be winning which maybe for example might be driving more engagement from the dealers. Just kind of any thoughts on broadly what's driving growth and anything specific from the dealers?
Yeah. It was a strong quarter, we had increases in volume per dealer, increases in active dealers and again it continued the trend we saw in the fourth quarter. The expansion of the sales force is clearly helping. We are seeing salespeople that we hired as part of that expansion grow faster than the overall average. So we know that there are adding to the total. We're seeing a nice progression there as the sales people age. So all good things there. It was a very positive quarter from a volume prospective.
But nothing particularly different from the dealer side of things?
No. No. It's really continuation of the trends we have seen. So strong growth in the purchase program, solid growth in the portfolio program but with less so than the purchase.
Last one for me. Sorry I'm going to have to ask another CECL question, and my question would be even more basic than Moshe's and David's question. But can you just really discuss what the alternatives are with CECL and what is fair value option accounting? Apologies for my ignorance, but can you just explain it in basic terms?
I mean CECL is an accounting methodology where -- as opposed to recognizing a loss when some event occurs, certain amount of delinquency or repossession of a sale of a car you anticipate that loss at the time you originate the loan and then book up a loss upfront. The flip side of that is over time cash equals accounting, so you’d end up reporting some loss at loan origination and then conceptually here that recognizing more revenue over time. The fair value option is looking at the coming up with an estimate of the forecasted cash flows that the portfolio would generate and you're basically calculating an exit price, which represents the fair value of the portfolio at that point which as I mentioned earlier would include an estimate of a discount rate, which would represent the return associated with exiting the portfolio.
Thank you. Our next question or comment comes from the line of Randy Heck from Goodnow Investment Group. Your line is open.
Brett the 18% unit volume growth or 33% dollar growth and also you had 25% volume growth in the month of April. How much of that is from the larger sales force versus perhaps easing competitive environment?
That's a tough one, Randy. I think it's harder to breakout the internal and the external factors. I mean we have -- we can see the growth that came from the people that we have hired since the expansion started. In rough terms they grew about twice as fast as the overall book did, so that still leaves decent growth in the sales reps that have been here or were here before the expansion started. So we're seeing faster growth from the new group, but strong growth from everywhere.
Okay. Second question, the adjustments to estimated collections there is a $10 million reduction in estimated cash flow over the life of a $5 billion loan portfolio. So $10 million less over the next three or four years. Would you consider that a rounding here given that its $10 million on $5 billion?
Yeah, it's a rounding here.
I think probably the right denominator to use is the future revenue that's embedded in, the accretable yield we got in the Q, that's about a $1.7 billion number, so $10 million on 1.7 billion is still a very small percentage and its probably less meaningful if you're looking at over a period of time. I think we had four positive quarters in a row, before this quarter. So if you take a six month average, the number is basically zero and if you take a longer average than that, you start to get a small positive number. But your point is well taken. No matter how you look at it, it is pretty close to zero.
Third question, I have is if I may, this regulatory stuff, you have got five or six states that have asked for information over the last -- up to four years ago without any development that we can see. You are -- you have been regulated by the CFPB for the last -- is it three years -- now three years in August I think? So most of that time under Richard Cordray's watch, meaning that pretty -- well under Richard Cordray's watch and yet nothing's come of that, I assume you've been audited too, I don't know if you can disclose that but -- by the CFPB. But my point is the CFPB presumable has rules that are similar to New York, and pretty much every other state. I know it sounds there is some real differences but by and large the rules of fair lending and so on are the same, are very similar. Is that a fair comment?
I think there are state differences but there are not huge differences. I think that maybe the main point here is that we have got, four years ago or in the last four years you pointed out, we have seven, eight, nine things that we've disclosed now I think in the 24 years I was with the company before that I don't think we had any. So clearly something has changed in the regulatory environment. We are under a lot of scrutiny. We have been for quite a while now. The regulators have a job to do, we respect that. They certainly have their -- it's their prerogative to ask questions and challenge the things that we are doing and it's our job to operate in a highly compliant way and we take that seriously. What's disclosed in the Q is where all those matters stand at this point. As you said it's going to generalize. We've been asked a lot of questions, we have provided a lot of answers and that's where it stands at this point.
And just if I may one last point. I want to say your -- once again your letter to shareholders is terrific for anyone that hasn't read it, you ought to. And also congratulations on 25 years of compounding earnings at north of 20%. Well done.
Thanks, Randy.
Our next question or comment comes from the line of John Hecht from Jefferies. Your line is open.
Thanks for taking my questions. Actually most of my questions have been asked. I guess one question is, we've seen your average loan size grow. Your term moving out. I know some of that's just predicated on continuing to increase the dealer purchase stuff. But I'm wondering is there a threshold where we might see some of those -- either the term advance or loan size increase slowdown, number one? And the second question is as I guess it's kind of related to that is, just you see if you can comment the overall competitive environment at this point time as well?
I think we've talked about the competitive environment, volume per dealer is the number to look at there. It was up this quarter that could cause you to conclude that the environment was easier, but at the same time we've made a big investment in our sales force which could also be driving that numbers. It's hard to break out what's internal and what's external there. In terms of the average term or the size of the loans, difficult to forecast that. We offer loan terms from 24 months up to 72 months, the average of that it's in the press release, this just reflects the mix. We offer a broader array of alternatives there and it's up to the dealers and customers to choose which alternative they like best. So we've seen an increase in the average term. it's just a function of the mix.
Our next question or comment comes from the line of Ken Bruce from Bank of America Merrill Lynch.
My question relates to the ABS market, I notice that there was a $500 million securitization completed in the first quarter. Could you talk about what the -- if there has been any changes to the terms of the ABS market relative to Credit Acceptance? We heard that there has been a little bit of choppiness in the auto ABS market, just wondering if that's impacting you at all?
The structure of our ABS hasn't changed in any meaningful way for a number of years. The market in subprime auto has been pretty good really since about the first quarter of 2016, obviously some periods are a little bit better than others. But it's been a pretty healthy market, so nothing really material to report there in terms of differences.
And in either spreads or depth of the book, have there been any changes in terms of the market itself? Maybe it's not necessarily reflected in structures and is there any changes in pricing or definitely buyers of the year -- of the paper?
In our last deal we issued at the tightest credit spreads we had in a number of years. That was offset by an increase in paper rates. So the all-in costs actually went up a bit. The credit spreads obviously vary over time, but in terms of more recent history, they have been at the tighter end of the historical range. In terms of the depth of the book, I'd say over time as people get more familiar with our program, the depth of the book has generally increased.
[Operator Instructions] We have a follow-up question from Moshe Orenbuch from Credit Suisse. Your line is now open.
I just wanted to revisit the comments you made about the volatility going down as the security vintages kind of age and while it's obviously true that as the vintages pay down each one successively has a smaller impact on the total. But I guess has it really happened that most of the 14 to 16 vintages you have written them up in the first year and then kind of subsequently written them down after that. I mean it seems like it's starting to happen on the 17 vintage this quarter. You maybe wrote them up during the quarter, so 17, and now takes down again. I guess maybe could you address that?
We disclose it every quarter, so you can certainly see the trend. I would probably just go back to the answer I gave Randy, it's the total for the quarter in dollar terms is minus $10.8 million. Either a big number or a small number, I think the appropriate denominator to use is the accretable yield that's in the portfolio, which is $1.7 billion, so $10.8 million divided by $1.7 billion is a very small number. And if you look at that over more than one quarter, it gets even smaller. See you can take that small number and parse it by year or parse it over time but it still doesn't change the fact that it's a very small number.
That is a small number, but that number is not discounted correctly. So that if there were changes to the timing like you exhibited in the fourth quarter that wouldn't be encompassed in that change?
It's not discounted but if we discount it will get even smaller, discounting doesn't make it larger.
If you look at the changes in the Q and the K you report what percentage of your loans actually have estimates that have changed to be better or worse than your original estimates? Those number numbers through 2016 were roughly 50% and at the end of '17 they were 75%, this quarter it went down a little bit to 70% or so. So that includes where there are changes both to the dollar amount which is at 10 point whatever million that you are referring to as well as the timing of those cash flows. So I guess that's my point just that it's not just the 10.6 million, it's also the timing of when that 1.7 billion would be realized.
Right. And we talked about that last quarter. We didn't change the timing estimate last quarter. We didn't make any further changes this quarter.
Thank you. With no further questions in the queue, I would like to turn the conference back over to Mr. Busk for any additional or closing remarks.
We would like to thank everyone for their support and for joining us on our conference call today. If you have any additional or 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.
Once again this does conclude today's conference. We thank you for your participation. You may now disconnect. Everyone have a wonderful day.