Agree with dtjejd points and I like the bladder analogy!
Only comment is that the special dividend was too low. This business is overcapitalized for the business model. IMO, Leverage needs to be 1-2 turns higher which is still conservative.
Note new disclosure in 10-Q:
"As a result of declining discounts, the Company would record additional provision for credit loss expense if losses were to remain constant."
I had a quick look at the delinquency reporting back in 2000 and its consistent with how they report it now. NICK are very good on the accounting disclosers and use conservative reporting. I didn't analyze the loan book back that far but my guess would be that they tightened up their underwriting when they came out of the 2000 recession -- so that may account for some of what you are seeing. Also the Manheim index went from 115 to 100 from 1999-03 causing loss rates to increase on repo sales driving higher net lossses.
If you haven't already ready, 'Analysis of Credit Losses' on pp18 of the Q, focusing on expected liquidation losses and impact of 'Aggressive' competition on future delinquencies and recovery rates may interest you.
Write-off to liquidation is guided to be 8-12% Q3. You can use that as another approach to your charge-off estimate. You don't wan't 12%.
"Consequently, if these trends continue, the Company would expect the provision for credit losses to increase for recent and future static pools."
I assume your question 'How can you be sure a down cycle is coming.' relates to my prior comment that I expect EPS to fall below 40c/q over the next 4 Q's?
If so I base it mainly on the increased provisioning required against the loan book. This will be the main driver of lower EPS.
This is based on the following:
- Delinquencies are now pushing to the lower bound of the last recession. This means more repossessions and sales.
- Manheim index is falling. This means less money recovered on each sale.
- Dealer discount getting cut. This means less money put into the allowance for loan loss as a buffer to absorb losses. (!00% of dealer discount is put towards covering loan losses)
- Current allowance against gross financials receivables is probably getting close the limit Peter is willing to take it. This means reserve releases over the last 6Qs is coming to an end.
Based on the above I expect 1MM+ provisions to start to kick back in over the next 4Qs. This reduces EPS. Dividend should support the stock though; just means P/E expands.
Your 6.5 P/E assumes EPS holds - It won't. My preliminary view is that EPS will likely go below 40c/q over the next 4 Qs. Expect provision to ramp back to 1MM soon. Could be worse if Manheim used car price index goes below 115.
This should be no surprise though - Well telegraphed tough environment with a) Peter's Performance hurdles lowered for bonus (see proxy), b) CFO selling a few months back, c) Origination volume struggling due to white hot competition and d) Dealer Discount getting sacrificed.
Peter needs to keep increasing the dividend to return capital to the shareholders. He won't though due to the unknown of the down cycle that the industry is entering.
46c Basic EPS if you unwind the swap write-off so more or less inline with what I was expecting from a EPS perspective.
+ves: Volume per branch was higher than I expected at 622,000 vs 610,000 I expected.
- Dealer discount is down to 7.41%. This is indicative of the hugely competitive environment. I'm not sure if DD has been this low before - I'd need to check but I think 8.04% was the prior low in Q2-2007 (back to 2002).
To get the branch volume NICK had to throw the Dealer Discount under the bus.
-Charge-offs materially picked up to 6.39% up from 4.07% last Q. That's about 1.7MM higher $$ charge-off than I expected and I'm guessing is due to a combination of manheim index rolling over impacting recovery values + higher volume of repossessions due to the ongoing deterioration in the loan book.
- 30+ PD now at 21MM up from 16.8MM last Q.
g/l NICKers -- Continued tough sledding ahead imo.
I see 1c eps increase (46c Basic EPS) under the assumption there is no more loan loss reserve release or additions. To get higher than that there needs to be a material pick up in originations per branch or they release another chunk of reserve releases - both possible but unlikely in this competitive environment I think.
Purchase Volume Assumption: $610,000 / branch * 63 branches = ~38.5MM (37.2MM Last Q and 35.1MM Y-o-Y).
Dealer discount: 8.1%
Provision Build/(release): $0
The King/Bible/Starnes BBT troika won't give you what you seek. To do so would be tantamount to admitting that the last 4 years of of NPA/TDR warehousing has all been a shell game. There is no upside for them to do this and come clean.
Expect a continued process of ongoing charge-offs/reo marks and higher provisions that continue to bleed ROA. This will continue until the NPAs/TDRs are all written down clearing values and only the troika know how long this will go on for.
It must have been tempting for BBT to use the regulatory guidance in Q3 as an opportunity to take some more wholesale writedowns on NPAs to make them closer to market and relieve future foreclosure and provision expense, however my view is that BBT are stuck and didn't implement the Regulatory directive on NPA writedowns in Q3 as BBT wanted to ensure they were in line with their peers on this comparable directive across banks.
Just what I would expect from BBT -- focus on the optics vs the economics. Just a 10% discount for being misled? Your brave.
"Why is BBT provision 3 times higher than MTB provision even though their current bad loans on a relative basis are about the same?"
It should be no surprise by now Norm, we've been back-and-forth on BBTs backend loss strategy since what 2008? We'll this is what the backend looks like: a thousand small cuts driving disappointment in the Longs.
The NPAs aren't marked correctly and BBT have to keep gradually writing them down like a melting glacier --more bleeding to go via provisions and forclosure expenses but the worst is behind them. MTB/WFC/USB etc all took the medicine up front -- King decided to a/mismark the NPAs then b/ look y'all straight in the eye and firmly say 'Our underwriting is good and the marks are correct.' c/ then keep gradually charging off and using forclosure expense and hope no-one notices.
Funny how no other major bank seemed to have this issue with NPA valuations declining that BBT seems to keep falling back on to justify the continued gradual writedowns.
You'll endup driving yourself insane torturing yourself comparing BBT to a high quality banks like MTB/WFC/USB. King just isn't that smart.
"Investors need and expect answers."
King has already given you his answer - Focus on the new magic-metric invented by BBT this Q 'Core-NIM'
Q4 kitchen sink coming up. BBT love Q4 to shovel more bodies out the backdoor hoping no one will notice.
King's FDIC answer was gobble-de#$%$ at BBTs finest. Just like BBT's accounting on NPAs that frustrates you so much. There is more to come. The NPAs and TDRs are still mismarked.
Each time a NPL washes through to REO and then finally sale, foreclosure expenses are required to correct the mismakrs that are still present on the balancesheet. Its part of Kings shell game to make the provision look light just like the shell game where King introduced core vs Non-core charge-offs and this quarters shell game of introducing Core vs Non-core NIM. King focuses on what analysts wan't and ensures the accounting chosen maxamises that metric. King can't change the economics of BBTs prior bad underwriting - just delay and spread-out the hit.
You still got Q4 regulatory clean-up on BBTs NPA assets to look forward to. Funny how every other major bank was able to get it done and take the hit in Q3. Not BBT though. It will be a nice big chargoff that you will be asked to ignore as a one time or 'Non-Core' charge as King likes to put it.
"I read the transcripts of jpm, wfc, usb and pnc. Think I understand. Then, I read bbt transcript. I'm confused. The transparency is not there particularly the reports provided by Clark Starnes, their chief risk officer."
Come on Norm - BBT has always played shell games with there accounting to hide the poor economics. Transparency has never been there.
Oh wait... This explanation from King should help:
"Matthew D. O'Connor - Deutsche Bank AG, Research Division
Yes, I guess I'm still a little confused. I mean, so the purchase accounting accretion
will be coming down from this level going forward as it has been. And then, I mean --
is that $90 million? I guess -- I know there's some puts and takes, but I assume that
should be coming down...
Kelly S. King -
Say, Matthew, let me hit it because it's always been confusing to me. But basically, so
think about it this way. The revenue is coming down, but the negative FDIC hit is coming
down also. So in other words, you get a negative end, so revenue is coming down, but you
got a positive and that the negative FDIC charges is reducing. The FDIC charge is not going
up, it's going down, that's the positive benefit."
Hi Joeytheghost - W.r.t NICK you mention "the dings and discounts just too high for our deal". Its interesting to watch how NICK's dings-'n-discounts to dealers continue to erode in the face of brutal competition in this space now. NICK will sacrifice volume once their dings-'n-discount threshold is reached though, they won't chase crazy deals like your example; they are very good underwriters, even if the actual business model isn't that great.
I am wondering if you have had any experience with CACC as a lending partner and any views on them you could share? Their partner business model seems more in line with a dealer who would like to retain some origination risk and share the higher loan income and fees.