Credit Acceptance responds to accounting and salesforce questions


Beyond its originations and collections activities, Wall Street observers questioned Credit Acceptance Corp. leadership about two specific operational areas when executives discussed their third-quarter results.

Investment analysts wanted to know about Credit Acceptance’s strategy for adding to its sales force to enhance its active dealer network, which stood at 7,737 dealerships at the close of Q3 on Sept. 30. That figure climbed by 946 new active dealers; stores that originate at least one contract with the subprime auto finance company during a quarter.

Another conference call participant also wondered how Credit Acceptance is bracing for upcoming changes in accounting regarding the allowance for losses. Last summer, the Financial Accounting Standards Board (FASB) issued an accounting standards update the organization explained was designed to improve financial reporting by requiring timelier recording of credit losses on loans held by financial institutions and other organizations.

What triggered a longer discussion was the salesforce dialogue between call participants and Credit Acceptance chief executive officer Brett Roberts, who shared that the company’s team to generate dealer activity is 30 percent larger now than it was a year ago. While the number of active dealers is higher, analysts questioned the productivity of the sales team since origination volume per active dealer softened by 9.7 percent year-over-year in the third quarter, resulting in Credit Acceptance’s total origination volume dipping by 4.7 percent to 78,589 contracts.

“As we talked about last time, it’s a longer-term play for us to increase the sales force,” Roberts said. “We don’t necessarily expect it to have any impact this year.

“If you go back and look at our history, the last time we increased the size of our sales force, it took us about two years to roughly double the sales force and then approximately three years after that before productivity got back to where it was when we started the expansion,” he continued. “So you’re looking at kind of a five-year process from start to finish. We’re not trying to double it this time, but we are increasing its size significantly, and we expect that’s something that will play out longer term.”

The analyst continued by asking when Credit Acceptance was making a play to carve out more origination volume through franchised dealerships along with its independent store footprint in hopes of driving the active dealer network to the 10,000 mark and beyond.

“We’re reluctant to sort of give you a stated goal long term that this is how big we’re going to get. I mean we’re obviously trying to get as big as we’re capable of getting, and we think adding to the sales force helps us do that,” Roberts said while acknowledging that the largest portion of Credit Acceptance’s originations came from franchised stores, “what we call national accounts, which are the kind of the largest dealer groups in the country."

He continued by adding, “We allow independents to write purchased loans if they’ve closed a pool of 100 loans on our portfolio program. So once we have some experience with an independent, if that’s positive, we’ll allow them to access the other program. And then there’s a limited number of independents that are allowed to write purchased loans from the beginning. Those are independents that we view as kind of quasi-franchise dealers, working to distinguish them from the traditional independents, and we’ve allowed them to write purchased loans as well. But most of it is franchise dealers and the larger national accounts.”

Later in the call, the topic turned to accounting as analysts inquired about how much the modified mandates for reserving for losses was going to impact Credit Acceptance’s financial standing and what preparations the company is already making for the changes to that go into effect in 2020.

“As we’ve talked about on prior calls, we’ve begun our assessment on that,” Credit Acceptance senior vice president and treasurer Doug Busk said. “The guidance is extensive and it’s complicated, and it’s not effective until 2020. Having said that, we’re making good progress. We’re working with our auditors on it. So when we know more, we’ll talk about it. But at this point, we haven’t finished quantifying the impact it will have on our financial statements."

Top-line results

Credit Acceptance reported Q3 consolidated net income of $100.7 million, or $5.19 per diluted share, compared to consolidated net income of $85.9 million, or $4.21 per diluted share, for the same period in 2016.

For the nine-month span that ended Sept. 30, the company’s consolidated net income came in at $293.1 million, or $14.99 per diluted share, compared to consolidated net income of $245.2 million, or $12.01 per diluted share, for the same timeframe a year ago.

As mentioned previously, Credit Acceptance noted its unit and dollar origination volumes declined 4.7 percent and 0.5 percent, respectively, during the third quarter. The number of active dealers grew 5.7 percent while average volume per active dealer declined 9.7 percent.

“Dollar volume declined slower than unit volume during the third quarter of 2017 due to an increase in the average advance paid per unit,” the company said. “This increase was the result of an increase in the average size of the consumer loans assigned primarily due to an increase in the average vehicle selling price and an increase in purchased loans as a percentage of total unit volume, partially offset by a decrease in the average advance rate due to a decrease in the average initial forecast of the consumer loans assigned.

“For three out of the four most recent quarters, unit volumes declined as compared to the same periods of the prior year,” Credit Acceptance continued. “This trend reflects the difficulty of growing the number of active dealers fast enough to offset the impact of the competitive environment on attrition and per dealer volumes.

“In addition, in response to the decline in forecasted collection rates experienced in 2016, we adjusted our initial collection forecasts downward during 2016. While the adjustments have been modest, we believe these adjustments have had an adverse impact on unit volumes,” the company went on to say.

Credit Acceptance named to The Detroit Free Press 2017 Top Workplaces List

In other company news, Credit Acceptance has been selected as a 2017 Top Workplace by The Detroit Free Press.

Credit Acceptance was named the No. 2 workplace in the large company category. This is the sixth year in a row that Credit Acceptance has won a Detroit Free Press Top Workplace honor.

“Credit Acceptance was selected from among hundreds of companies vying for a place on the list,” the company said. “Our ranking was based solely on the results of a team member survey administered by Energage, LLC (formerly WorkplaceDynamics), a leading research firm that specializes in organizational health and workplace improvement.

“Several aspects of our workplace culture were measured, including alignment, execution, and connection, just to name a few,” Credit Acceptance added.

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