AutoNation, Lithia making progress with captive finance companies

AutoNation Inc. and Lithia Motors Inc., the two public franchise retailers with the ability to approve loans for their own customers, said on their earnings calls last month they are making progress building those fledgling captive finance companies.

AutoNation Inc.'s decision to create its own captive finance lender is paying off, with AutoNation Finance helping to improve the retailer's customer mix, loan originations and more, AutoNation CFO Thomas Szlosek said.

"We love the platform," Szlosek said on the company's Feb. 13 fourth-quarter earnings call.

AutoNation paid $85 million for CIG Financial in 2022 and turned it into a captive finance company, using it at first to write loans at AutoNation USA standalone used-car stores. The integration continued with AutoNation ceasing to lend to customers at independent dealerships and adding the captive finance company as a lender for AutoNation franchise customers.

AutoNation Finance's post-acquisition evolution has been substantial, Szlosek told analysts.

"It started out entirely as a third-party lender, mostly to subprime" borrowers, Szlosek said. "Over the last year, it completely converted that now to supporting AutoNation exclusively both in AutoNation USA stores as well as the franchise stores with very little in terms of subprime, so it's really gone through a nice transition."

Szlosek said that market trends overall in AutoNation have improved as AutoNation Finance has been woven into its operations.

"The trends have been very strong," he said. "We've got an improvement in the origin mix with all AutoNation customers. FICO scores have improved … in terms of what we were originating, and the credit quality trends, the 30-day delinquencies have been really strong."

As of the third quarter of 2023, borrowers were late on making payments for 7.5 percent of AutoNation Finance's loans, Szlosek said. That delinquency rate improved by about 2 percentage points through the end of January, he added.

Szlosek said Jeffrey Butler, president of AutoNation Finance and a CIG holdover, has guided the division well, even as he faces higher interest rates and other market challenges.

"He's doing a nice job in what is not an easy environment for consumer credit," Szlosek said. "We're happy with that."

AutoNation Finance has increased its market penetration rates and now handles a roughly $450 million portfolio, even after a sale of a chunk of its business in the third quarter, Szlosek said. The company reported $451.2 million in loan receivables at the end of 2023, up 20 percent from a year earlier.

"We're excited about 2024," he said. "We think [loan] originations could double and we just couldn't be more pleased with how the business has developed over time."

AutoNation ranks No. 2 on Automotive News' list of the top 150 dealership groups based in the U.S., with retail sales of 229,971 new vehicles in 2022.

Meanwhile, Lithia's Driveway Finance Co. "looks to achieve break-even later this year," Lithia CEO Bryan DeBoer said on an earnings call Feb. 14.

Lithia began aggressively developing the current incarnation of its captive finance company, previously known as Southern Cascades Finance Corp., in the fourth quarter of 2020, growing it from acting as the lender in 4 percent of sales and building a $724.9 million portfolio in 2021 to an 11 percent penetration rate and a $3.2 billion loan book in 2023.

Driveway Finance lost $45.9 million in 2023, but Lithia foresees the new initiative could produce up to $10 million in income this year on a $4 billion portfolio while financing 12 percent of U.S. sales. Eventually, Lithia anticipates Driveway Finance playing a role in 15 to 20 percent of sales and producing $550 million to $650 million in income.

"The DFC team has demonstrated success navigating through the fluid interest rate environment, while maturing its capital structure and liquidity position," DeBoer said on the earnings call.

He said Driveway Finance had "another strong quarter, with a smaller than expected loss" of $2.1 million. That is down from a $4.4 million loss in the third quarter, Chuck Lietz, Lithia's senior vice president of finance, said on the call.

Lietz said the weighted average interest rate on Driveway Finance loans rose to 10.3 percent in the fourth quarter, up 2.1 points from a year earlier and 0.3 points from the third quarter.

"As a captive lender sitting at the top of the funnel," he said, Driveway Finance was able to raise rates without taking riskier borrowers.

"Now that our yield is aligned with the market, we expect penetration will increase in 2024 and beyond as we look to scale," he said.

Lietz said 86 percent of Driveway Finance's portfolio has been funded by securitizing and selling bundles of loans or by warehouse financing. Such options free up cash for a lender rather than having to wait and slowly regenerate it with consumer payments over the life of the loan.

Driveway Finance could expand its scope into leasing, other Lithia business segments or internationally someday, Lietz said. However, DeBoer told Automotive News on Feb. 15 he was unsure if leasing would be a priority anytime soon, citing the difficulty of determining vehicles' residual values at lease end.

Lithia, of Medford, Ore., ranks No. 1 on Automotive News' list of the top 150 dealership groups based in the U.S., retailing 271,596 new vehicles in 2022. That figure includes vehicles sold outside of the U.S.