Monday, Oct. 29, 2007, 08:00 PM UPDATED 11:59 AMBy Nick Zulovich
FORT WORTH, Texas — Reviewing AmeriCredit's subprime portfolio, Dan Berce, president and chief executive officer, indicated that it is showing pressure in delinquencies and losses from its 2006 loan vintage.
The further seasoning of this vintage has caused the management team to speculate that cumulative net losses will be 100 to 150 basis points higher that previously expected.
"Our revised expectations result from two main factors," Berce explained. "First, we now believe that there will be a more prolonged time frame before the bankruptcy substitution effect will normalize. While national bankruptcy filings have been increasing, our filing levels have not increased by the same magnitude.
"Further, we expect our filing rates to normalize at less than our pre-October 2005 levels," Berce continued. "This behavioral shift has accelerated the timing of defaults we are seeing in our 2006 vintage as well as the increased severity of these losses.
"Second, for the past several years, in the midst of a strong economy, there has been an industry-wide expansion of risk as AmeriCredit and other lenders have sought to grow at higher than overall market rates. We expected weaker credit results in such an environment and actual credit performance has turned out to be slightly worse than our expectations," he noted.
To counteract the risk, he said the company is taking steps to improve credit execution on loans originated.
"For example, we are implementing tighter tolerances for loan-to-values in lower credit tier loans for new loan originations. We are lowering our originations target for the fiscal year to $9 billion to $9.5 billion as we approach a potentially softer economy and weaker consumer sector with more caution and focus on tighter credit and pricing," Berce reported.
Overall, portfolio net credit losses came in at 5.4 percent for the third quarter, compared to 3.3 percent in the June quarter. However, excluding Long Beach, officials said net credit losses increased to 5.7 percent from 5.4 percent from the prior year.
"We experienced higher-than-expected credit losses in lower credit tier loans from our Long Beach portfolio this quarter," Berce said. "These lower tier loans represent about 25 percent of the Long Beach portfolio. The strength of the Long Beach platform and its historical underwriting expertise has been in the higher tiers of near-prime lending, not in the lower tiers which overlap with AmeriCredi'ts subprime underwriting expertise.
"We are not seeing the same deterioration in Long Beach's higher-end near-prime originations, nor are we seeing any spillover impact of subprime mortgages in our near-prime portfolio," he explained.
During the quarter, AmeriCredit originated $2.4 billion in new loans and leases, overall, compared to 2.5 billion in the June quarter and $1.7 billion in the September 2006 quarter.
"The sequential decrease in origination volume resulted from normal seasonality as well as our efforts to slow originations' growth through more aggressive pricing strategies in light of the difficult credit markets," Berce indicated.
"During the September quarter, we successfully raised APRs on new-loan originations by approximately 25 basis points across our platforms and at an even greater rate in our core subprime business," he went on to say.
"Of our origination volume for the September quarter, $272 million were originated through our Long Beach platform, $251 million through our prime Bay View platform and $142 million through our leasing platform," Berce highlighted.
He also noted that as a part of the company's decision to integrate all platforms, that it has relocated its Long Beach collections and customer service operations from Orange, Calif., to Arlington, Texas. This happened as AmeriCredit officers take over managing the servicing activities for the Long Beach portfolio, as well as risk management, which covers portfolio analysis.
"We anticipate that the distraction of migrating the near-prime servicing platform over the next few months may result in a continuing trend of weaker credit performance in the Long Beach portfolio through the December quarter, and we are working hard to mitigate any potential problems during the transition," Berce said.
Continuing on, Chris Choate, chief financial officer, indicated that AmeriCredit continues to be successful with regards to funding.
"In general, the credit markets this quarter can be characterized as extraordinarily difficult and volatile," he explained. "For AmeriCredit, it has been an exceptionally successful funding quarter.
"In August, we renewed our $500 million repurchase facility with the same credit spread and a better advance rate matrix than the previous agreement. Then in September, we completed a one-year, $1.5 billion prime/near-prime facility," he continued. "This facility replaced our three separate prime and near-prime facilities totaling $1.45 billion.
"As of the end of the quarter, we have committed warehouse capacity totaling $5.4 billion, of which $3.25 billion is not scheduled to mature until October 2009 and the balance of which is not scheduled to mature until the summer of 2008," he said. He also referred to the two recent securitizations the company executed covering $2 billion.
Breakdown of Results
For the company, overall net income came in at $62 million, or $0.49 per share, for its fiscal first quarter, compared to $74 million, or $0.54 per share, for the same period a year earlier. Operating results included Long Beach Acceptance Corp. since its acquisition on Jan. 1 of this year, officials noted.
Specifically, auto-loan purchases increased to $2.38 billion, compared to $1.68 billion for the same quarter last fiscal year. Moreover, managed receivables totaled $16.40 billion, compared to $12.33 billion, executives reported.
Annualized net charge-offs were 5.4 percent of average managed receivables for both the September 2007 and September 2006 quarters.
Managed receivables 31-to-60 days delinquent were 5.5 percent of the portfolio, compared to 6 percent last year. Accounts more than 60 days delinquent were 2.6 percent of the portfolio, compared to 2.5 percent a year ago, according to the company.
"While we saw normal seasonal credit deterioration during the September quarter, we also experienced weaker than expected results primarily from loans originated in 2006. As a result of this underperformance and a potentially softer economy in the near term, we have boosted the provision for loan losses for the quarter, which reduced our net income," Berce said of the overall results.