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 First Quarter 2019 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 Credit Acceptance, Senior Vice President and Treasurer, Doug Busk.
Thank you. Good afternoon, and welcome to the Credit Acceptance Corporation first quarter 2019 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.
Thank you. [Operator Instructions] One moment for our first question. Our first question comes from Hugh Miller of Buckingham. Your line is now open.
Hi, thanks for taking my questions. So just add one on the tax rate. And I was wondering if you could to provide some color on kind of what was driving at this quarter and how we should think about that on a go-forward basis?
Sure. The tax rate was a little lower this quarter than it was in the the fourth quarter of last year – or the fourth quarter of last year. And the reason for that is that, we get a tax deduction when restricted stock – or VAS or restricted stock units are converted into common shares. The amount of the deduction is based on the fair value of the shares. If that amount exceeds, the fair value of the awards on the grant date that’s something called excess tax benefit and gets recorded as a reduction to our tax rate.
Yep. Okay, great. And then just in terms of – as we think about assessing the collectability trends and also the spread trends, is it fair to compare that that 2019 vintage relative to, let’s say, the 2018 vintage on one where was initially booked, or is it a better assessment to kind of look at that where it’s currently booked as a fair comparison to where you said initial expectations for 2019?
I think, both are relevant numbers. I think, the 2019 business has a slightly higher initial forecast. It’s too new to know whether it’s going to settle in. The 2018 vintage has been around a little longer and it settled in at a higher caution forecast than where it started. So we just – we’ll watch 2019 and see where it goes, things little bit early to decide, whether one vintage is better than the other.
Okay. And last from me, just in terms of where we stand with CECL fair value decision have been a progress in terms of just how things are shaking out? Where you might kind of see things for 2019 – for 2020, I’m sorry?
We’ve continued to assess our alternatives internally. I think we’ve made progress. So as I said in prior quarters that when we do make a decision, we’ll update our disclosures appropriately, make an announcement at that time. So really nothing further to report today.
Thank you very much.
Thank you. Our next question comes from John Rowan of Janney. Your line is open.
Is 24% or so correct tax rate going forward, though?
I think, we estimate our long-term tax rate to be 23%. Obviously, that is a long-term number, so you’re going to – that factors in things like that that happened this quarter, which again, isn’t going to happen every quarter.
Okay. And then I know obviously, people always ask about the competitive environment. You obviously oftentimes said that volume per active dealer partner, we source a drop. So our conclusions this quarter versus prior quarters at the environment is probably a little bit tough just given the decline in the active – in the volume per active dealer partner?
We don’t have another reason for the decline. So, in course that we don’t have another reason for it. We usually attribute to the competitive environment, okay? And then was there anything one-time in nature in the other income line, or Or was there something seasonal in there. I’m just trying to remember, which is a little higher than I was anticipating.
I don’t think there’s anything one-time. We have a disclosure comparing the first quarter of this year to the first quarter of last year in the 10-Q. And most of the increase was related to ancillary product profit-sharing. But we also had a larger amount of interest income and that was offset by decreases in a couple of other line items.
Okay. And then just lastly is there any information that you can give us? It seems like you disclosed the new –CID in the 10-Q. Is there any information that you can share with us regarding that?
I mean, not really anything other than what’s disclosed in the Q. Obviously, the regulatory environment has been much different for the last five, six, seven years. So I think this is just part of what we can expect in the environment we operate in
All right. Thank you.
Thank you. Our next question comes from Vincent Caintic of Stephens. Your line is open.
Hey, thanks. Good afternoon. A couple of questions. First, couple of focus on the purchased loan. So you’ve had some nice growth there over the past couple of quarters since becoming increasingly a bigger part of the business. Just kind of wondering, so first you had your forecast for the spreads increase. And historically, it’s exceeded your initial forecast. I’m just kind of wondering how you initially anticipate the purchased loan spread forecast and how they’ve been increasing over time?
And then when I look at the difference in spreads between the purchase loans versus the dealer loans, so the spreads are lower for purchase loans. And I’m wondering if that’s true after accounting for the dealer holdback and if it is true. Purchased loans generally less risky than dealer loans. So you can have a lower spread on that, or how do I think about the risk adjusted returns between the two products you offer?
Well, as we’ve said, before we prefer the portfolio program, because it aligns our interest, it also shares the risk on the consumer loan with the dealer. So if we collect $1 less than what we expect on the portfolio program, 80% of the lab is borne by the dealer in the form of a reduction in dealer hold back.
On the purchase loan program, if we miss our forecast by $1, all of that comes out of our pocket. So we would characterize for that reason the portfolio program is being less risky than the purchase program.
Having said all that, the purchase loan business has performed very well. It’s actually generated a larger positive variance on average than has the portfolio program over the last 10 years. So we think that writing those purchased loans with a big margin of safety is a good use of our capital.
Okay, that’s helpful. Thank you. Is there – and I guess looking from 2018 versus 2019, so spreads versus your initial estimates are better in 2018. Is 2019 sort of the right spread that you’re targeting, if that’s kind of your initial estimate? And if so, is there room – because you’re seeing such good performance with the purchased loans, is there room for more volume that you could catch in there?
I mean, we try to price our business to maximize economic profit, which is just economic profit for loan times the number of loans originated. With the benefit of hindsight, you could argue that the way we price the purchased loans historically has been too conservative.
Those loans have performed nicely better than expected. And knowing what we know now, we could have priced those loans a bit more aggressively. But we do try to put our best number forward and we try to, like I said, maximize that equation and try to be accurate with our forecast.
Okay, great. Very helpful. And last one for me and completely separate. But the – a nice increase in the new dealers or I guess the dealer is not active in both periods. Just wondering if there was any particular driver there. I know people will say competition maybe goes away or if there’s anything else there that might shed light on that, that would be appreciated? Thank you.
I think the first quarter is usually a good quarter for enrolling new dealers. We got a larger sales force than we had a year ago. So those are probably a couple of reasons why new dealer enrollments were pretty good. Attrition was also pretty good. The number that hurt us this quarter, the same as last quarter, was volume per dealer.
Okay, very helpful. Thank you.
Thank you. Our next question comes from Moshe Orenbuch of Credit Suisse. Your line is open.
Great. Thanks.. I did notice that 2016 and 2017, the reductions were small, but you started to see some reductions in the forecast. Anything that’s going on that be driving that?
I think when you look at the forecast, the best number to start with is the one on the second page of the release. We show you the increase in forecasted net cash flows. Positive number this quarter is $16.7 million. It’s nice to have a positive number there. That’s a very small number relative to the amount of cash flows that we’re trying to forecast.
But I think that tells a story better than looking at a 10 basis point change for any individual vintage. Overall, forecast was generally in line with what we expected a little bit better than that and I think that’s probably a fair conclusion.
Okay. And then on the CECL idea, I know that you don’t have any further info. But could you talk a little bit about how fair value would work and how variability in kind of estimates and revenue and provision revenues would work into the construct?
I mean, fair value conceptually would be like, well, it’ll be just marking our portfolio to market each period. So the value of the portfolio would represent not only the expected cash flows into the portfolio, the expenses of third-party would need to incur a service to portfolio and the third parties required rate of return.
So the – as we’ve pointed out, one of the drawbacks to fair value is the value of the portfolio and thus our financial performance in any period can be impacted by things that have nothing to do with the underlying performance of the portfolio like changes in interest rate or changes in market-based rates of return. But at a high level, that’s how it would work.
Right. I guess, I mean the question is, I mean from the perspective of variability, how would you settle with it compared to the current construct?
I would say it has the potential to be more volatile. The current earnings that we have today, the – could be volatile, but that volatility would directly have to do with the performance of the underlying loans. With fair value, you could have some variability associated with the performance of the loans, but you could also have variability associated with things that have nothing to do with the loans.
Got it. Thanks so much.
Thank you. Our next question comes from Dominick Gabriele of Oppenheimer. Your line is open.
Hi, thanks so much for taking my questions. Can we just talk about how much of the book is moving towards younger cars as we make a portfolio mix change to more purchased loans. Can you just talk about the impacts there between the average car age versus – and the dealer portfolio loans versus the purchased loans and how that could be affecting your interest rates that you collect over the average life of the loan and – or the interest income rather? Than would be great. Thanks.
We have seen a shift of the mix of business that we’ve originated over the last four or five years. Not only are we originating a larger percentage of purchased loans, but we are financing newer, more expensive vehicles than we were three, four, five years ago. Those phenomena have resulted in an increase in the average amount of the retail installment contract, principal plus interest and therefore an increasing in the average advance. So that phenomena has contributed to dollar growth being greater than unit volume growth in recent periods.
Great. Thanks. And then when you – as you think about what gets a dealer to provide more applications over time and become a stronger – or have a stronger relationship with Credit Acceptance. What are some of those attributes? And what’s the timeframe would you say that it takes for a brand-new relationship for you to get five applications a month to 10 to 20, whatever it may be? What’s the strategy there and the timeframe it takes typically would you say?
How much business a dealer sends us, how many applications, how many contracts you book really reflects everything we do as a company, because the dealers on the portfolio program, at least, get 80% of whatever we collect. Even our loan servicing function affects how satisfied the dealer is with our products. So it’s really all encompassing. It’s everything we do. The better product we offer the dealer, the more business they’re going to write.
In general, if you take a particular month’s vintage of new dealers, the amount of business they do increases over time. But also dealers in that vintage will drop out. So there’s two effects there that offset each other, but I don’t know if there’s a typical timeframe that someone ramps up, that’s going to be useful to you in terms of trying to forecast future loan volume.
Great. Thanks. And then just one more if I could. When you think about the strategy among targeting franchise dealers, let’s say, non-franchise dealers. What are some of the big differences there? And what makes maybe one better than the other, not even better, but perhaps just the differences in the – trying to obtain those long-term relationships. Thanks.
In general, our program works very well at a small independent dealer, it works very well with a larger franchise dealer, sometimes the selling process can be different. The larger organizations, typically, there’s more people that need to sign off on a new lender, so it could be a little bit more complex.
And then when you get into stores that have multiple locations and maybe a corporate office, there’s another selling process that occurs there. But other than that, the program works in all kinds of environments.
Thanks for taking my questions.
Our next question comes from Nick McGibbon of Thrivent Financial. Your line is open.
Hi. I have kind of a broad question. I was hoping you guys could help me understand how you think about the amount of leverage that you employ from kind of a downside risk perspective? I guess just on like the overall amount, but also how you structure it secured versus unsecured?
Yes. The way that we determine how much leverage to employ is, we run series of financial projections looking at different leverage, different funding mix, different maturity management strategies. And what we’re trying to do is that utilize a funding strategy that produces a cost-effective result when the capital markets are open and readily available, but also produces an acceptable result when the capital markets are closed for an extended period of time.
So we do that analysis. We look at different funding strategies, different leverage, et cetera, and pick the approach that works well in both good and bad capital market environments.
Okay. And then I don’t know if this will be easy to answer knowing that all the ABS structures you have are probably a little different. But are there any kind of major covenants across the board on your ABSs that – in kind of a worst-case scenario, you would think could get close to getting triggered or anything like that?
I mean, we obviously have performance triggers in our ABS like any issuer does. None of them are particularly concerning.
Okay. Thank you.
Thank you. Our next question comes from John Hecht of Jefferies. Your line is open.
Thanks, guys. I understand that in the grand scheme of things, the increase in expected cash flows and the purchased loans is a huge number. But I’m wondering, can you characterize what changed over the quarter? Was it something tied to frequency or severity in terms of the increase there?
I really can’t break it down any further than what’s in the release. I mean it’s a pretty small number. It’s nice to have a positive variance, but we don’t have a breakdown for you.
Okay. And similar to other first quarters, you guys had a big increase in the new dealers – new dealerships. I’m wondering can – is there any geographical kind of trend there? Anything you could – and then can you tell us how many of those are franchised versus independents or so forth, any characteristics of the new dealerships?
The franchised versus independently really hasn’t changed a lot. We’ve been having better success in recent years signing up sort of larger franchise stores on a purchase program and that’s where the growth is coming from. In terms of – I forgot the other part of your question.
Geography?
Geography, yes. In general, we’ve been doing better in areas where we’re strong and we’re struggling in areas where we’ve historically struggled. So – and some of our – if you look at our SEC filings, you’ll see the states where we have the biggest concentrations. We continue to do well in those states and we continue to struggle in the states where we have lower penetrations.
Okay. And then similar to last year, should – is there something seasonally we should think about in terms of net attrition in the dealerships in Q2, or is that just something that happened over the last couple of years and it’s not necessarily seasonal thing?
So there’s a seasonal component there. A lot of dealers will come on during tax season, write business and then fall off in the second quarter. So if you look at that seasonal pattern, that’s probably a good place to start.
Okay. Thanks guys very much.
Thank you. [Operator Instructions] Our next question comes from Giuliano Bologna. Your line is open.
So I guess, just starting off with one question on the dealer loan side, it looks like there was a decrease in the unit volume versus the prior year and purchased volume really made up the balance. How should we kind of think about the dynamic there? Hence we continue – should we expect that to continue going forward?
The forecast there, but that’s been the trend. And over the last several quarters, we’ve been growing the purchase loan program and the dealer loan program has been less successful.
That makes sense. And think about kind of on a little different question. Obviously, the 2018, vintage had positive provisions on the forecasted collection. Is there anyway of framing where those increases came from, because there are a couple different theories out there around repossessions being higher with newer vehicles or wage garnishments being higher potentially with lower payroll taxes? Is there anyone driver that kind of an outsized impact in the year?
So I don’t think so. It’s – we’re talking about small changes here. I think, the prior question was essentially the same one. So no, we don’t have a breakdown for you. It’s a small variance. We’re happy to see it, but we don’t have any further detail for you.
And just one other quick one. One of the things I noticed was the increase in restricted cash – looks like restricted cash went up about $140 million. Is that tied to any sort of transaction?
I mean, the bulk of the reason for that is, we have restricted stock that – or restricted cash rather that relates to collections on securitizations that is in the collection account and is used to reduce debt on the subsequent distribution date. The increase in the amount of securitization debt, together with the higher than normal collections that occur during the first quarter of the year, account for the increase there.
Makes sense. Thank you. Thank you for taking my questions.
Thank you. Our next question comes from Dominick Gabriele of Oppenheimer. Your line is open.
Thanks. Sorry about that, just if I can follow up on one more. You guys had a forecast for the year on interest expense of 50 basis points in the previous quarter for 2019, given the new Fed rate path. Do you think that’s still the same there? And then also, do you think that the $20 million in the first quarter of other income, is that a good run rate going forward or was that kind of a little higher in the first quarter and we expect that to come back down towards that $15 million, $16 million and $17 million level. Thanks.
I mean relative to the interest expense, I think when I offered that last quarter, I had a qualifier about constant mix of debt based on the shape of the forward LIBOR curve, a couple of pretty big assumptions there. I still think that, we see rates increasing going forward, but there’s probably more uncertainty relative to the magnitude of those increases today than there was 90 days ago.
So I think, a lot of it just depends on just what happens with base rates. Base rates go up over time. Our cost of debt is going to go up and base rates stay more flat, the same will happen to us.
In terms of other income, I don’t really have any guidance to share there. We – there hasn’t been a huge amount of seasonality in other income historically. You can kind of look – take a look at the quarterly numbers to see the trend line.
Perfect. Thanks so much.
Thank you. With no further questions in queue, I’d like to turn the conference back over to Mr. Busk 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@creditacceptance.com. We look forward to talking to you again next quarter. Thank you.
Once again, this does conclude today’s conference. Thank you for your participation.