Good day, everyone, and welcome to the Credit Acceptance Corporation third 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 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, welcome to the Credit Acceptance Corporation third quarter 2018 earnings call. As you read our news release posted on the investor relations section of our website at creditacceptance.com, 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, I will take your questions.
Thank you. Ladies and gentlemen, if you have a question at this time, please press star then one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from Moshe Orenbuch of Credit Suisse. Your line is now open.
Great, thanks. You guys show here that the average volume per active dealer kind of decelerated to a -3% from up about 6% in Q2, a couple of other metrics that had similar sorts of things. Can you kind of put that in the context of how you're seeing the competitive environment at this point?
Yeah, I think that's the best number to look at. We had a few quarters there where volume per dealer improved, which was nice to see. This quarter obviously went the other way. In the absence of any other explanation for that, I think we'd probably conclude that the competitive environment had something to do with it. Active dealer growth was strong. Attrition was pretty good, volume per dealer was definitely the weak number in the quarter.
Is there any way to kind of think about that as we go forward for the-
Again, we've expanded the sales force. We do expect to grow as a result of that. We had three pretty good quarters in a row from a growth perspective. Last two being better than the prior. This quarter was down a little bit from the trend line. Volume per dealer was the culprit. Again, we don't have any other explanation for it other than we expect the competitive environment had something to do with it.
Gotcha. From the standpoint of adoption of CECL, you, I think, repeated pretty much the same disclosures the last time. Has there already been any progress in the work in terms of how things would look from a fair value standpoint?
We're continuing to evaluate CECL. We're continuing to evaluate fair value. We didn't really change our disclosure in the 10-Q because really there's nothing more material to report at this time. We'll continue to do our work, when we have something new to disclose, we will.
Great. Okay. Thank you.
Thank you. Our next question comes from Kyle Joseph of Jefferies. Your line is now open.
Great. Thanks for taking my questions. Just kind of wanted to get your thoughts on your cost of funds going forward. Obviously, you've seen a bit of an increase, but nowhere near what we've seen from benchmarks. Can you describe the dynamics going on there? Are you guys seeing spread compression on new deals? Give us a sense for your outlook going forward.
Well, our cost of funds is up modestly. The reason it's not up as much as benchmarks is that most of the borrowings we have outstanding at the current time are fixed rate. The impact of increasing rates impacts us as the existing fixed rate deals that are less expensive roll off and become a smaller part of our debt and are replaced by higher cost financings. That's really what's accounted for the increase in our cost of funds to date. In terms of the future, I don't have any unique insight there. The expectation in the market, whether you look at the 30-day LIBOR curve or some other index, is for rates to increase for the foreseeable future. If those forecasts are correct, our cost of funds will go up. If it's not, the impact on our cost of funds will be more muted.
It's basically a function of what happens to base rates.
Got it. To Moshe's earlier point, we can look at volume per active dealer, but would you say the increase in benchmarks has had any impacts on your competitors and loan demand out there?
From the volume per dealer number, you'd have to say no in the third quarter at least. Whether it will have an effect going forward, who knows? In the third quarter, we thought it was a pretty competitive environment.
Got it. One last one from me. Just on the improved cash flow outlook on the purchase loans. That's consistent with recent quarters. I'm just trying to read through the tea leaves and see if there's anything different there, whether it's a different customer, or whether you're underwriting those differently, or what's driving that improvement.
I think the best way to look at that number, $17.1 million positive variance against close to $8 billion in undiscounted forecast cash flows, is the forecast was very stable for the quarter.
Fair enough. Thanks for answering my questions.
Thank you. Our next question comes from Dominick Gabriele of Oppenheimer. Your line is now open.
Hey, guys. Thanks so much for taking my questions. Just wanted to ask about the efficiency ratio this quarter. It came in a little better than we were expecting. Could you talk about some of the investments going forward that you may have, and/or why some of the efficiency improvement kind of quarter-over-quarter, and what we could expect there?
When you're speaking of efficiency, are you looking at the table that we have in the press release that talks about operating expenses as a % of adjusted capital?
I was looking at the total expenses as a % of total revenues.
Okay
which seemed to be a bit better than we were expecting.
Yeah. Either way, we have benefited historically from improvements in operating leverage. That's because some costs are variable and grow roughly at the rate of the business. Others are more fixed or semi-fixed in nature and grow at a slower rate than the business. We have benefited from operating expenses over a long, or operating leverage over a long period of time as we've grown. We've also gotten more efficient at certain things we do. That's really what's contributed to that improvement.
Okay. Just on, you mentioned that the competitive environment was kind of strong this quarter. Can you just talk about what you're seeing on it from a credit perspective within your borrowing base? Has there been any changes in the behavior of your borrowing base, and has that contributed to some of why you've seen a better outlook on your credit book?
Yeah. Again, I think the best measure there is our forecast. For every contract we originate, we have a forecast for how that contract will perform. In the press release, we show how the contracts actually performed relative to our initial estimate. I think that the message from this quarter and really the last several quarters is that the forecast is very stable.
Got it. All right. Thanks so much for taking my questions. I appreciate it.
Thank you. Again, ladies and gentlemen, if you would like to ask a question at this time, please press star then one on your touch-tone telephone. Our next question comes from Ken Bruce of Bank of America Merrill Lynch. Your line is now open.
Hi. It's actually Ken Bruce. Kevin's my brother. My first question is on the consumer loan volume from dealers not active in both periods. You had some significant year-over-year growth this quarter as well as last quarter. It looks like it was partly driven by some easier comps from last year's quarters. Is there anything that you could talk to that would give us a better understanding as to why you're reactivating more inactive dealers at this point?
Yeah, I'm not sure that's what the table says. I think if you look at the dealers we're reactivating, it's a pretty small percentage of the total. I think what this reflects is you just have dealers that sort of inconsistently write business, so they write business some quarters and not in others. I wouldn't read too much into that line.
Well, I understand on the reactivation side, but just in terms of the increased volume, is there any increased focus on the part of the sales force that's maybe getting more loans through that from those previously inactive dealers at this point?
I think it kind of directionally goes in the same direction as unit volume. Last year, unit volumes were down 5%. This year, they were up 9%. That certainly explains part of it. There's no new initiative that accounts for the number you're seeing.
Okay. Are you currently adding to your sales force? What's the current level of investment into increasing volume?
We've been increasing the size of the sales force now for a good couple of years. The current expansion, we are continuing to make investments in it, but it's not growing as rapidly as it was 12 months ago, for instance.
Right. Okay. Maybe just lastly, I guess the spreads continue to come in just over the last, well, really several years, and you've had some good performance just in terms of the increasing level of forecast collections, which has been leading to some nice earnings drivers, specifically on the provision line. Is there a way to frame effectively how low that spread could go, just kind of out of the box from here?
We don't price to a specific spread. I think in the 10-Q, there's a little bit more information on the, that would allow you to look at the average size of the loan, the amount we're advancing against expected future cash flows, the amount of accretable yield in each loan we write. I would probably point you to that if you're looking to get an idea of what sort of yields we might have going forward.
Great. Yeah. I've been looking at that recently, maybe I'll follow up with Doug just in terms of some other more detailed questions around that. Okay. Well, thank you for your comments this evening.
Thank you. With no further questions in the queue, I would now like to turn the conference back over to Doug 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. You may now disconnect.