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 Second Quarter 2019 Earnings Call. Today’s call is being recorded. A webcast and transcript of today’s earnings call will be made available on the 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 second 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] Our first question comes from Moshe Orenbuch of Credit Suisse. Your line is open.
Great, thanks. So Doug, we noticed that you did have some expanded discussion of CECL in here and you talked about – that you're going to elect CECL as opposed to fair value. Could you talk a little bit about the thought process that went into that?
Well, basically, we're faced with two accounting alternatives that in our opinion did a poor job reflecting the underlying economics of our loans and our current method does. We elected CECL for a few different reasons, one of which is because we wanted to minimize the volatility in our financial results that would occur under fair value in a period of changing interest rates. That volatility could have a material impact on our financial results and financial conditions. So CECL has less volatility relative to market based interest rates. So that was one consideration. Additionally, we've modified our revolving credit facilities, so that the amount we're going to be able to borrow and our ability to comply with the covenants is going to be unaffected. We expect to be able to do the same with our Term ABS financing. And then the final thing is, as we said, in the queue, we believe we're going to be able to explain to shareholders how CECL diverges from economic reality. So really that was the thought process.
So I guess, I mean, if you've done that work, can you share with us what – your results. I'd assume that means you're probably running in parallel. Could share with us what the results would look like under CECL?
We're not prepared to quantify the impact of CECL. At that point, we expect to provide incremental disclosure in Q3 of this year.
Got you and I mean, we noted that you hadn't done a securitization since back in February. Was that the – you mentioned that you'll be able to in the future kind of restructure them, is that – what should we expect from a funding standpoint?
I mean, the reason we didn't do a securitization this quarter really doesn't have anything to do with CECL. We have already done a securitization in a senior note issuance this year. So we've accomplished quite a bit from a capital raising perspective. We don't think that the adoption of CECL is going to have a material impact on the structure of the securitizations.
Okay and then just lastly the commitments footnote does mention a New York State AG subpoena that was issued, I guess, what two and a half months ago, I mean is there anything you can kind of add to what's in there?
Nothing really, other than what's disclosed in the queue.
Okay, thank you.
Thank you. Our next question comes from David Scharf of JMP Securities. Your line is open.
Hi, good afternoon. Thanks for taking my questions as well. First question, Doug, focusing on leverage and I actually could – just as well have been asking this question every quarter, but given the pullback in rates and reduced funding costs, figured it becomes more and more topical. Obviously, your ROEs are quite high, you're certainly under no pressure to expand them, but at two times debt to equity, certainly in comparison to some other public auto lenders and subprime lenders, you're comparatively undervalued, is there any thought to levering up beyond sort of the current range that we've been seeing recently of about two times?
I mean the range over the last five years or so has been between two and two and a half to one. So we're at the low end of the historical range. I mean, the reason we operate with the leverage that we do is we want to be able to produce strong results and originate a reasonable amount of business that the capital markets are unavailable to us for an extended period of time. So that's the rationale behind employing the leverage that we do.
Okay, so we should interpret that as you're certainly not seeing anything materially different in the business fundamentals that would lead you to lever up further. One question just on pricing directionally, when I just do a simple average calculation, we just take average, beginning and ending balances for the quarter divided into the finance charges come up with an average yield, I think 21.8, which is the same as Q1. Obviously, a lot goes into that IRR calculation, forecasted losses as well. But at a high level, is it fair to assume that your average pricing on new originations hasn't changed materially over the last three months?
Yeah, nothing's changed from a pricing perspective.
Okay, got it. And then last question, following up on Moshe. This is not meant to be a got you question. I think it may just be pure coincidence. In the disclosure the New York State subpoenas May 7 and the New York State DFS actually dropped their investigation just two weeks before that. CFPB had another CID just a couple of days before that. Mississippi decided to pursue a suite. Looks like there were there four actions within just 15 days, is that pure coincidence or is there a sense that there's maybe an acceleration of activity in other states that may come to the surface?
No, we don't have any insight into when and why those things get started. So yeah, it's just coincidence or that's been normally [ph] played into that?
Understood, alright, thank you.
Thank you. Our next question comes from Hugh Miller of Buckingham. Your line is open.
Hi, good afternoon, thanks for taking my questions. So I was taking a look just obviously, at the loan volume per dealer being down maybe at 9% year-over-year. Seems like you guys were kind of increasing the advanced rates and being a little bit more – giving more of an incentive to do business. What's the feedback that you're hearing from dealers, just about kind of their sensitivity around advanced rates and what they may do to see to maybe do a bit more business?
Yeah, I don't think we get much insight from dealers on the pricing. The change in vibe per dealer, it's big for us. But for an individual dealer, it's not enough that they would notice. We've had a period before where volume per dealer's come back down and we're in one of those periods where it's tough right now. The positive for the quarter was we were able to grow the active dealer base. So as long as we can continue to do that volume per dealer at some point will level out.
And is there a strategy? I know you guys have yet some hiring activity. Just to kind of incentivize the sales force to try and drum up more business with the dealers or is that just – is that not as much of a focus?
We've expanded the sales force there. They have lots of incentive to grow the business in their markets. Many of them are having success. We are flat for the quarter. So we had, as you might expect, roughly half the markets were growing and half the markets were doing the opposite. And the net effect was not much growth for the quarter, but I don't think it has anything to do with sales force incentives.
Got it, that's helpful. Thank you. And then just as we look at the allowance for credit losses and we track that relative to the gross bond portfolio, it has been trending a bit lower. But as we think about that in the context of seeing a mix shift towards more purchase loans, which don't offer some of the dealer participation protection. How should we think about that ratio on the relationship there and at some point, is there kind of a minimum threshold on that allowance relative to the loans that we should consider or how should that trend, I guess?
The way we think about it and I guess the way we would recommend that others think about it, is to focus on the adjusted results and then you don't have to worry about the allowance ratios or why the provision went up this quarter. You can – adjusted results really simplify the financials in a way to focus on what's important.
Got you, okay. And then just last for me, as we think about just the trend in the purchase loans and the yields kind of maybe dipping below the 20% threshold. Can you just talk a bit about how you think about issuing – or putting capital to work in purchase loans relative to maybe consuming more of stock buyback given how strong your ROE is?
I mean, we think that – I mean, as we've said, many times, we prefer the portfolio program because of the alignment of interests. And the way it shares the risk on the loans with the dealers. Having said that, we're generally in a position where we have more capital that we can invest in the portfolio program or return to our happy web. So we think investing in purchase loans at returns or happy web is a better use of our capital than buybacks.
Okay, thank you.
Thank you. Our next question comes from Giuliano Bologna of BTIG. Your line is open.
Good afternoon. Thanks for taking my questions. I guess just trying to figure out and back into some of the numbers that it looks like the average loan size on the purchase program seems to increase significantly kind of on the high teens sequentially. Is there any change there as far as the term higher on some of the purchase loans in the quarter that may be driving? Just trying to figure out what the driver might be there?
It's usually a correlation between term and sizable loan. So that's probably the case, just the change in mix. We're not writing any loans that we haven't written before. We're just writing a different mix than we did in the prior period.
And is it – do you notice any sense of the duration or if the duration extended more so on the purchase alongside because that may explain it if you increase a few months on the purchase side versus the dealer program.
I don't think there's been a material difference.
Okay, that makes sense. I appreciate that. Thank you very much.
Thank you. [Operator Instructions] Our next question comes from Dominick Gabriele of Oppenheimer. Your line is open.
Hi, thanks a lot. When we just think about the year-over-year average gross loan receivables and the movement there, can you just walk us – everybody through again, how your unit volume and the active dealer growth all translate eventually to the gross loan receivables? Thanks.
Over a long period of time the growth receivable will grow at the same rate as your origination growth. But obviously there's a big lag between one and the other. So we were flat this quarter from a unit perspective, we had some growth from a dollar perspective. If that growth is consistent over the next two years, your loan receivable growth will decelerate until it reaches that point. So we're – the balance sheet is growing based on prior period's origination growth and because the origination growth was slower, this quarter and last quarter, we would expect the balance sheet growth decelerate.
Thank you. And then when we think about the G&A expense, it may seem a little picky. I'm just looking at the G&A expense and it's a bit elevated from what we've seen in the last few quarters. Is there something going on there or we should think about a higher elevated run rate going forward on what we've seen in the last few quarters or is this kind of just a one off something was in there?
I think it's impossible to tell for – I mean, we disclosed the reasons for the elevated level of G&A in the press release and the 10-Q. But I'm not going to make a prediction as to what level that expense will be at in future periods.
Okay, great. And then you have seen the collections actually on both dealer and purchase loans for the 2018, '19 vintages come in better this quarter than your initial estimate. Can you just talk about what you're seeing and why your expectations have risen for collections in those two vintages in particular?
I think if you look at it over a long period of time the forecasts have been pretty accurate over a 21 year period. Now, we've published forecast results, you got roughly an even split between years where we've been optimistic and years, we've been pessimistic. I think we got a few more favorable results and unfavorable, but there's going to be a variance from period of period. This quarter in total, if you look at the variance, the best number of focus on is the dollar amount and the change in the forecast during the quarter, $13 million pretty small number. So I think a fair conclusion two draw is the forecast was pretty stable this period.
Okay, got it. And then can you just talk about what is – I think this was asked slightly before, can you just talk about what may be driving your price per unit paid in particular that's helping the dollar volumes over the unit volumes in a little more detail?
You mean the dollar amount of the advanced thing or the amount paid to the dealer at origination?
Yeah, exactly, thank you
Again, just a mix issue, so we're not doing any loans we haven't done before. It's just a different mix we saw this quarter than last quarter.
Okay, great. Thanks so much, guys. I really appreciate it.
Thank you. With no further question in queue, I would 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. We thank you for your participation.