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Credit Acceptance Corp (NASDAQ:CACC)
Q2 2019 Earnings Call
Jul 30, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to the Credit Acceptance Corporation Second Quarter 2019 Earnings Call.

[Operator Instructions]

At this time, I would like to turn the call over to Credit Acceptance's Senior Vice President and Treasurer, Doug Busk.

Douglas W. Busk -- Senior Vice President and Treasurer

Thank you. Good afternoon, and welcome to the Credit Acceptance Corporation Second Quarter 2019 Earnings Call. As you read our new 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.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Moshe Orenbuch of Credit Suisse. Your line is open.

Moshe Orenbuch -- Credit Suisse -- Analyst

Great. Thanks. So Doug, we noticed that you had some expanded discussion of CECL in here and you talked about -- hope 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?

Douglas W. Busk -- Senior Vice President and Treasurer

Basically we're faced with two accounting alternatives that, in our opinion, did a poor job reflecting the underlying economics of our loans that 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 condition. 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 are 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 Q, we believe we're going to be able to explain to shareholders how CECL divergence some economic reality. So really that was the thought process.

Moshe Orenbuch -- Credit Suisse -- Analyst

So guess, I mean, if you've done that work can you share with us what that your results? I assume you're probably running in parallel. Can you share with us, what the results would look like under CECL?

Douglas W. Busk -- Senior Vice President and Treasurer

We're not prepared to quantify the impact the CECL at this point, we expect to provide incremental disclosure in Q3 of this year.

Moshe Orenbuch -- Credit Suisse -- Analyst

Got you. And I mean, I noted that you hadn't done securitizations since back in February. Is -- was that -- 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?

Douglas W. Busk -- Senior Vice President and Treasurer

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 and 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.

Moshe Orenbuch -- Credit Suisse -- Analyst

Okay. And then just lastly the -- the commitments footnote does mentioned a New York State AG subpoena. That was issued, I guess what 2.5 months ago, I mean, is there anything you kind of add toward in there?

Douglas W. Busk -- Senior Vice President and Treasurer

Nothing really other than what's disclosed in the Q.

Moshe Orenbuch -- Credit Suisse -- Analyst

Okay. Thank you.

Operator

Thank you. Our next question comes from David Scharf of JMP Securities. Your line is open.

David Scharf -- JMP Securities -- Anlayst

Hi, good afternoon. Thanks for taking my questions as well. First question Doug, focusing on leverage, I actually could just as well have been asking this question every quarter, but given the pullback in rates and that's reduce funding costs. Figured it becomes more and more topical obviously your ROEs are quite high certainly under no pressure to expand them, but a 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.

Douglas W. Busk -- Senior Vice President and Treasurer

I mean in the range over the last five years or so has been between 2 and 2.5 to 1. 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 of 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.

David Scharf -- JMP Securities -- Anlayst

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.

Douglas W. Busk -- Senior Vice President and Treasurer

Yes, nothing's changed from our pricing perspective.

David Scharf -- JMP Securities -- Anlayst

Okay. Got it. And then last question, following up on most. This is not meant to be a got your 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 day -- a couple of days before that. Mississippi decided to pursue a suit. Looked like there were four actions within just 15 days. Is that pure coincidence? Or is there a sense that there is maybe an acceleration of the activity in other states that may come to the surface.

Douglas W. Busk -- Senior Vice President and Treasurer

No we don't have any insight into when and why those things get started. So it's coincidence or not, we don't have any insight into that.

David Scharf -- JMP Securities -- Anlayst

Understood. All right. Thank you.

Operator

Thank you. Our next question comes from Hugh Miller of Buckingham. Your line is open.

Hugh Miller -- Buckingham -- Analyst

Hi, good afternoon, and thanks for taking my questions. So was taking a look, just obviously at the loan volume per dealer being down maybe at 9% year-over-year. It seems like you guys were kind of increasing the advance 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 advance rates and what they may need to see to maybe do a bit more business?

Brett A. Roberts -- Chief Executive Officer

I don't think we get much insight from dealers on the pricing the change in volume 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 we're volume per dealer has come back down and we're in one of those periods where it's tough right now. The positive for the quarter was we're 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.

Hugh Miller -- Buckingham -- Analyst

And is there a strategy -- I know you guys did 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?

Douglas W. Busk -- Senior Vice President and Treasurer

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 -- and as you might expect roughly half the markets were growing and half the markets we're 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 the sales force incentives.

Hugh Miller -- Buckingham -- Analyst

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 loan portfolio. It has been trending a bit lower but as we think about that in the context of seeing a mix shift toward more purchased loans which don't offer some of the dealer participation protection. How should we think about that ratio in 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.

Douglas W. Busk -- Senior Vice President and Treasurer

The way we think about it and I guess the way we would recommend that others think about it is the focus on the adjusted results and then you don't have to worry about the allowance ratios or where the provision went up this quarter. You can adjust the results really simplify the financials in the light of focus on what's important.

Hugh Miller -- Buckingham -- Analyst

Got you. Okay and then just last from me, as we think about just the trend in the purchased loans in 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 purchased loans relative to maybe considering more of a stock buyback given how strong your ROE is?

Douglas W. Busk -- Senior Vice President and Treasurer

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 vest in the portfolio program or returns or happy with. So we think investing in purchased loans at returns or happy with is a better use of our capital than buybacks.

Hugh Miller -- Buckingham -- Analyst

Okay. Thank you.

Operator

Thank you. Our next question comes from Giuliano Bologna of BTIG. Your line is open.

Giuliano Bologna -- BTIG -- Analyst

Good afternoon. Thanks for taking my questions. What I was trying to figure out back into some of the numbers that it looks like the average loan size on the purchase program seems to increase significantly kind of in the high teens sequentially. Is there any change there? Or is it term higher on some of the purchased loans in the quarter that's may be driving that. I'm just trying to figure out what the driver might be there?

Douglas W. Busk -- Senior Vice President and Treasurer

You see a correlation between term and sizable loan, so that's probably the case, just a change in mix we're not writing any loans that we haven't written before, we're just writing the different mix than we did in the prior period.

Giuliano Bologna -- BTIG -- Analyst

And is it -- do you know if there is any sense of the duration or the duration extended more so on the purchased loan side? Because that may explain it if you're -- if you increased a few months on the purchase side versus the dealer program.

Douglas W. Busk -- Senior Vice President and Treasurer

I don't think there has been a material difference.

Giuliano Bologna -- BTIG -- Analyst

Okay. That makes sense. I appreciate that. Thank you very much.

Operator

Thank you. [Operator Instruction] Our next question comes from Dominick Gabriele of Oppenheimer. Your line is open.

Dominick Gabriele -- Oppenheimer -- Analyst

Hi, thanks a lot. What we just think about the year-over-year average gross loans 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.

Douglas W. Busk -- Senior Vice President and Treasurer

Over a long period of time, the gross receivable will grow at the same rate as your origination growth. But obviously there is 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 periods' origination growth. And because the origination growth was slower this quarter and last quarter, we would expect the balance sheet growth to decelerate.

Dominick Gabriele -- Oppenheimer -- Analyst

Thank you. And then when we think about the G&A expense you 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. We should think about a higher elevated run rate going forward than what we've seen in the last few quarters? Or is this kind of just a one-off something was in there?

Kenneth S. Booth -- Chief Financial Officer

I think it's impossible to tell. 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.

Dominick Gabriele -- Oppenheimer -- Analyst

Okay. Great. And then you have seen the collection is actually on both dealer and purchased loans for the 2018, 2019 vintages come in better this quarter than your initial estimates. Can you just talk about what you're seeing and why your expectations have risen for collections in those two vintages, in particular?

Brett A. Roberts -- Chief Executive Officer

I think if you look at over a long period of time -- the forecasts have been pretty accurate over, I think a 21 year period now we published forecast results you got roughly an even split between years where we've been optimistic and years we've been pessimistic. We've got a few more favorable results than unfavorable, but there's going to be a variance from period-to-period, this quarter in total if you look at the variance, the best number of focus on is the dollar amount of the change in the forecast during the quarter, $13 million pretty small number. So I think a fair conclusion to draw is the forecast was pretty stable this period.

Dominick Gabriele -- Oppenheimer -- Analyst

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.

Kenneth S. Booth -- Chief Financial Officer

You mean the dollar amount of the advance being or the amount paid to the dealer at origination?

Dominick Gabriele -- Oppenheimer -- Analyst

Yes, exactly. Thank you.

Brett A. Roberts -- Chief Executive Officer

Again just a mix issue, so we're not doing any loans we haven't done before. It's just the different mix we saw this quarter than last quarter.

Dominick Gabriele -- Oppenheimer -- Analyst

Okay. Great. Thanks so much guys. I really appreciate it.

Operator

Thank you. With no further questions in queue. I would like to turn the conference back over to Mr. Busk for any additional or closing remarks.

Douglas W. Busk -- Senior Vice President and Treasurer

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.

Operator

[Operator Closing Remarks]

Duration: 17 minutes

Call participants:

Douglas W. Busk -- Senior Vice President and Treasurer

Brett A. Roberts -- Chief Executive Officer

Kenneth S. Booth -- Chief Financial Officer

Moshe Orenbuch -- Credit Suisse -- Analyst

David Scharf -- JMP Securities -- Anlayst

Hugh Miller -- Buckingham -- Analyst

Giuliano Bologna -- BTIG -- Analyst

Dominick Gabriele -- Oppenheimer -- Analyst

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