Lithia Motors Inc. lowered the forecast for its captive finance company, Driveway Finance Corp., for the next three years and expects a $40 million loss for the business this year.
The company sliced its 2025 forecast for Driveway Finance income by more than half and trimmed portfolio expectations by a third for that year.
Lithia CFO Tina Miller said the change in outlook was driven by two factors: First, Lithia wanted to combine information related to Driveway Finance to give clear line of sight of that business to investors. And second, Lithia updated modeling in terms of what loans are looking like.
“So with the rising interest rates, there’s been a little bit of net interest margin compression,” Miller said, speaking on the company’s first-quarter earnings call on Wednesday.
Lithia, which reported lower first-quarter earnings on the call, included the updated forecast in its first-quarter investor presentation.
In it, Lithia said it predicts Driveway Finance to have a portfolio size of $3 billion in 2023, with a loss of $40 million expected for this year. In Lithia’s fourth-quarter investor presentation, the auto retailer forecasted Driveway Finance to have a portfolio size of $4 billion in 2023, with the business expected to generate $10 million in income this year.
Miller said the company decided to simplify its quarterly financial reporting by adding a line for financing operations income or loss.
In the first quarter, Lithia reported a financing operations loss of $21 million compared with income of $5 million a year earlier. Lithia saw increases in interest expense and provision for losses for its financing unit in the first quarter.
A Lithia spokesperson said results from Pfaff Leasing, part of the company’s Canadian stores, are included in the figures.
In its first-quarter investor presentation, 2022 showed a $4 million loss for Driveway Finance because Lithia didn’t include $43 million in expenses for net charge-offs.
Starting March 1, Lithia said its forecasted amounts for Driveway Finance include net charge-offs in provision expense and capture changes in interest rates on recently originated loans.
- For 2024, Lithia now forecasts a Driveway Finance portfolio size of $4 billion and income of $1 million compared with a portfolio size of $6 billion and income of $105 million shared in the fourth-quarter presentation.
- For 2025, Lithia predicts a Driveway Finance portfolio size of $6 billion and income of $82 million. Lithia previously expected Driveway Finance to reach a portfolio size of $9 billion and income of $210 million in 2025.
Lithia reaffirmed that it expects Driveway Finance to have a $17 billion portfolio and income of $650 million at an unspecified future date.
On the call, Driveway Finance Vice President Chuck Lietz said that as Lithia grows, so will the number of auto originations. That will require a larger current expected credit losses accounting standard reserve, he said.
“So when we sort of break out that next year number, profitability will go down as a result of that headwind,” Lietz said. “But then, as that portfolio starts to amortize and starts to generate positive returns and normalizes out those [current expected credit losses] reserves, it should be accretive on a forward-looking basis.”
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. Lithia’s sales figures include dealerships outside of the U.S.
