Pierre Money Mart Blog

CHARLOTTE, N.C. — Wachovia recently announced that its vehicle finance division is working to reduce the percentage of seven-year auto loans it is offering to consumers, setting a goal of 2 percent compared with a high of 6.5 percent.

Moreover, the company reported it is increasing pricing in its auto portfolio.

According to officials, managed auto loans came in at $28.528 billion in the second quarter, compared with $26.357 billion in the first quarter and $23.181 billion in the second quarter of 2007.

Meanwhile, net charge-offs declined to $134 million, or 1.97 percent, from $151 million, or 2.32 percent in the first quarter. However, this figure remains up from the second quarter of last year when it came in at $71 million, or 1.23 percent.

Wachovia reported that the number of accounts 30 days past due reached 2.33 percent, compared with the industry forecast of 3.74 percent.

Discussing risk mitigation strategies, officials explained their ongoing focus remains on prime originations.

“New originations average a FICO score of 672,” the management team pointed out.

Additionally, they noted, “Average LTV of new originations continued to decline.”

As for the company’s upgraded collection system, officials said this has resulted in improved response times.

Wachovia said its auto portfolio has a loss allowance ratio of 3.08 percent.

FORT WORTH, Texas — AmeriCredit announced Monday that it is further reducing monthly auto loan originations to $100 million and closely monitoring its warehouse covenants in an effort to withstand the difficult operating environment and come through the other side.

“With many of our competitors scaling back or exiting the subprime auto finance space, even at this low origination run rate, we believe we will be able to maintain our national footprint and preserve our franchise value for when conditions improve,” explained Dan Berce, president and chief executive officer, Monday.

Announcing the company’s first-quarter fiscal 2009 results, Berce indicated that $579 million in new auto loan originations were purchased by AmeriCredit during the period, down from $780 million in the previous quarter.

“The decline in originations’ volume is driven internally by our focus on preserving liquidity in light of the current capital markets environment and externally by a reduction in new- and used-car demand,” he reported.

“Earlier this year, in an effort to reduce origination volume, we significantly tightened credit guidelines and lifted the minimum required credit scores,” he continued. “While still early, key performance metrics, such as delinquency rates on the 2008 vintage originations are encouraging.

“During the September quarter, we were able to take advantage of the rapidly changing competitive environment to raise rates and the net fees we charge on loans while remaining selective on the quality of loan applicants we approved,” Berce said.

Meanwhile, Chris Choate, chief financial officer, indicated that the “capital markets continue to be highly volatile and challenging for us to access.”

Even so, Choate said the company was able to execute its $500 million 2008-1 AMCAR securitization in early October.

“At this point, our Wachovia funding facility is fully utilized and cannot be drawn against in the future,” he noted. “While both the funding cost and our required capital investment in the 2008-1 transaction have increased dramatically and we have at best a breakeven profitability on the loans securitized, this transaction was critical to providing permanent financing for approximately $650 million of finance receivables.”

Continuing on, Choate explained, “We are currently evaluating investor interest for another securitization prior to this calendar year end. While we anticipate the market appetite for subordinated bonds to remain limited and all-in pricing to be higher than the 2008-1 transaction we just completed, we expect credit enhancement levels to remain relatively stable.”

By the end of the quarter, AmeriCredit had $3 billion of warehouse credit facilities to support subprime originations. As of Oct. 23, Choate said the company has available borrowing capacity on these lines to fund $1.5 billion in subprime originations.

“These facilities are not scheduled to mature until October 2009,” he highlighted. “We anticipate that the renewal process for these facilities may be challenging and our warehouse capacity may be reduced and the borrowing terms will not be as favorable as currently exist given the economic and capital markets.”

He went on to say that AmeriCredit is in compliance with all warehouse covenants as of Sept. 30.

“We are closely monitoring two covenants,” he added. “One covenant requires that we maintain a portfolio net loss ratio of less than 8.5 percent of average receivables on a rolling six-month basis. The other is an aging limitation in our $2.25 billion Master Warehouse Facility that requires us to buyback receivables that have been pledged to the line for more than 364 days.

“If we are unable to securitize additional receivables by May 2009, we may not have sufficient liquidity to repurchase these aged receivables from the warehouse facilities. While we do not forecast breaching either of these covenants, if we were to breach them, our lenders could declare an event of default on our warehouse lines and, potentially, remove us as servicer of the portfolio,” Choate stressed. “A declaration of an event default in our warehouse lines would result in an automatic event of default in certain securitization transactions as well as our unsecured debt.

Moreover, he said the company is monitoring a covenant with its Deutsche Bank forward purchase commitment which requires AmeriCredit to maintain a portfolio net loss ratio of less than 8 percent of average receivables on a rolling six-month basis.

“If we were to breach this covenant, we would be unable to utilize the remaining capacity in our Deutsche commitment,” Choate reported.

Quarterly Specifics

AmeriCredit announced a net loss of $1.7 million, or $0.01 per share, for its fiscal first quarter ended Sept. 30, 2008. This compares to the company reporting a net income of $61.8 million, or $0.49 per share, for the same period a year earlier.

The allowance for loan losses as a percentage of finance receivables increased to 6.8 percent from 6.3 percent at June 30, 2008.

Originations were $579.3 million for the quarter ended September 30, 2008, compared with $2.4 billion for the same quarter last fiscal year.

Additionally, finance receivables totaled $14.1 billion, compared with $16.4 billion last fiscal year.

Annualized net charge-offs totaled 7.3 percent of average finance receivables for the quarter, compared with 5.4 percent for the prior period in 2007.

Finance receivables 31-to-60 days delinquent were 7.4 percent of the portfolio, compared with 5.5 percent in 2007.

Moreover, accounts more than 60 days delinquent were 3.6 percent of the portfolio, compared with 2.6 percent a year ago.

Unrestricted cash was $243.8 million, excluding $112.3 million of investment in The Reserve Primary Money Market Fund, which has been reclassified to investment in money market fund due to the fund’s temporary suspension of distributions.

The company has additional liquidity of about $150 million from borrowing capacity on unpledged eligible receivables, officials indicated.

During the September 2008 quarter, AmeriCredit retired $114.7 million of its 1.75 percent convertible notes. Book value was $16.49 per share at September 30, 2008, executives reported.

Offering a bit of insight, Berce said Monday, “Increases in credit losses, delinquencies and deferments during the September quarter reflected typical seasonal deterioration exacerbated by the protracted slowdown in the economy.

“Credit results were also affected by our plans to carry an elevated level of delinquencies and maximize our use of deferments to provide our customers the financial flexibility to navigate through the next few challenging months into a seasonably better part of the year. We anticipate that these actions will minimize the ultimate losses in our portfolio,” he continued.

AmeriCredit’s recovery rate on repossessed assets came in at 41 percent for the period, compared with 43.6 percent in the previous quarter. Berce said the management team expects the recovery rate to continue in the low 40-percent range going forward.

“As we head into what typically is our weakest quarter for credit performance, we expect to experience higher credit losses as an increasingly deteriorating macroeconomic environment continues to pressure our customer base,” he explained. “As a reminder, our credit metrics have and will continue to reflect material upward pressure due to the denominator effect of a declining portfolio balance.

Looking Ahead

According to Choate, the company’s subprime warehouse lines may require about $100 million in additional credit enhancement by calendar year-end.

Also, he said, “Our forecast indicates that we remain close to performance trigger levels on three of our securitization trusts for several more months and we may continue to trap cash to build higher credit enhancement levels. One of these trusts, the 2007-D-F securitization breached its default trigger during the September quarter.”

Wrapping up the conference call, Berce explained, “Consumer confidence is at all-time lows, unemployment is steadily increasing and the capital markets have remained stubbornly restricted. Operating in this environment over the past year, we have seen and expect to continue to see pressure on our portfolio credit performance and our liquidity position.

Furthermore, he indicated, “And we have rationalized, and will continue to rationalize, our infrastructure and operating expenses to our reduced originations target. On the credit front, we are diligently managing our portfolio performance by increasing staffing and hours worked and optimizing the use of all the collection tools at our disposal.

“While we expect to face challenging economic headwinds throughout 2009, we remain confident that our business model is viable and that it addresses a fundamental need of middle-market consumers,” Berce said.

“And, once the economy improves and access to the capital markets opens back up, AmeriCredit is well-positioned to take advantage of a much improved competitive environment. Until that time, we are committed to taking additional steps as necessary to protect and preserve the value of our franchise,” he concluded.

FORT WORTH, Texas — In AmeriCredit’s latest moves to remain nimble in the current market atmosphere, the company’s chief executive officer said in a conference call Wednesday that it has reduced originations over last year by two-thirds, ceased originations in Canada, ended leasing and direct lending activities, in addition to suspending production in its prime platform and cutting back on near-prime originations.

During the company’s conference call on its fourth fiscal quarter results yesterday, Dan Berce, who also serves as president, explained, “During the June quarter, we purchased $780 million of new originations, which as planned is a significant reduction in volume compared to $1.3 billion for the March quarter.

“Consumer demand for new- and used-vehicle purchases has softened considerably over the past several months. This softening demand, combined with the pullback by most of our major competitors, has allowed us to maintain a strong market presence with auto dealers even as we decreased our origination volumes by two-thirds from last year,” he continued.

In fact, due to the lessened consumer demand for vehicles, Berce said the company currently expects annualized origination volume to come in at less than a $3-billion run rate.

In other adjustments, Berce reported, “We have also been evaluating the profitability and capital intensity of all our lending products and channels. As a result of this process, we have discontinued originations in Canada and ceased leasing and direct lending activities. We have also suspended production on our prime platform and significantly pulled back near-prime originations to focus on our traditional subprime core.

“Our decision to limit prime and near-prime credit offerings was based on our inability to generate adequate profitability from these products given the higher funding costs and capital requirements of the current environment. With our constrained volume objectives, we are focusing on originating those loans that provide the highest possible returns,” he told investors.

On a more positive note, Berce indicated that despite the falling auction values of large SUVs and pickups, the company’s recovery rate on repossessed collateral has remained stable from quarter-to-quarter at 43.6 percent, compared with 43.9 in the previous period.

“Despite significant year-over-year decline in the value of large SUVs and pickup trucks, we have experienced relatively stable recovery rates for the last several quarters due to a greater concentration of compact and more fuel-efficient vehicles in our portfolio, which have actually increased in value year-over-year,” he pointed out.

“Also, we have not seen anything in our portfolio metrics to suggest that frequency of default is correlated with vehicle-fuel efficiency,” he added. “We expect recovery rates to remain in the low 40-percent range, subject to the normal seasonal strengths and weaknesses.”

As for delinquencies, he stated Wednesday, “For the June quarter, credit results followed normal seasonal trends with a modest improvement in credit losses and increasing delinquencies. Annualized net credit losses were 5.9 percent for the June quarter, compared to 6.6 percent for the March quarter and 3.3 percent a year ago.”

Additionally, 30- to 60-day delinquency rates for AmeriCredit came in at 6 percent in June, compared with 5.3 percent in the March quarter and 4.7 percent a year ago.

Accounts greater than 60 days delinquent were up slightly to 2.9 percent, compared with 2.3 percent in the prior quarter and 2.1 percent in the same time frame of the last fiscal year.

“Although difficult to measure, we believe we experienced some benefit to payment rates due to the stimulus funds distributed to consumers during the June quarter,” Berce highlighted. “Looking at future credit performance, we expect the macro-economy will stay weak as higher unemployment and rising gas prices strain household budgets and apply additional pressure on portfolio credit performance as we go into the normally weaker credit season in the second half of the calendar year.

“We now expect net losses to fluctuate in the mid 6 percent to upper 7 percent range, which is slightly worse than our expectations as of the end of our March quarter,” he remarked. “As a reminder, our credit metrics going forward will reflect upward pressure due to the denominator effect of a declining portfolio balance. This will likely impact our net credit loss rate in fiscal 2009 by more than 100 basis points, when compared to a portfolio size that’s stable.”

According to Berce, a significant portion of the company’s loan volume reductions are due to implementing tighter credit guidelines with higher loan pricing.

“Since January 2008, the average custom score of the subprime loans we’ve originated has increased over 10 points and loan-to-wholesale value decreased over 10 percentage points to approximately 110 percent,” he explained.

“At the same time, we have been able to raise the rate and net fees we charge on those loans. While still early, the tighter credit guidelines we implemented have resulted in significant improvement in credit performance in the 2008 origination vintage, compared to the 2006 and 2007 vintages. We will continue to evaluate credit on a regional basis, balancing credit standards and market performance, and increase pricing in markets where competitive dynamics support them,” he added.

To continue strong support of AmeriCredit’s portfolio, the company indicated that staffing reductions were not made in its collections infrastructure.

“We now operate 24 loan origination offices in major markets fully staffed to service our dealer customers all hours they are open to sell cars. Our sales organization still provides national coverage in support of our loan origination offices,” Berce said.

However, the company did close or consolidate 21 origination offices during the quarter. Related reductions were also implemented in overhead and support areas.

“In aligning our organizational structure to our revised originations and portfolio targets, we have been careful to preserve the core strength of our business model and protect future value of our franchise,” Berce stressed.

He then handed the call over to Chris Choate, AmeriCredit’s chief financial officer, who discussed another key area of the company’s business — funding.

In May, AmeriCredit announced a $750 million asset-backed securitization under its automobile receivables trust, which mostly covers subprime auto loans.

Deutsche Bank Securities and Credit Suisse are the lead managers on the transaction, while Barclays Capital, Lehman Brothers and Wachovia Securities are the co-managers.

Referring to this, Choate said, “The ABS markets showed notable improvement leading up to our execution of this deal and we were in a position to take advantage of market conditions. Furthermore, we were able to clear all the bonds in the market and did not have to utilize our forward purchase commitment with Deutsche Bank.

“Needless to say, the capital markets have taken a step back since May. Shortly after our successful May securitization, we began to focus our efforts on using senior subordinated structures for future securitizations as concerns around FSA’s financial condition began to surface. Early today (Wednesday), FSA announced that it will no longer issue asset-back securities. This announcement was not a surprise to us. FSA-insured dealers had not only become less attractive to investors, they were also ineligible under our Deutsche Bank agreement  based on FSA’s credit default swap levels and the negative watch on their credit rating,” he explained.

While he indicated that the company has historically favored issuing bond-insured asset-backed securities, Choate said the company has issued more than $4 billion of senior subordinated securities under its AMCAR and APART securitization platforms.

“Credit enhancement requirements in a senior subordinated structure will be somewhat higher than in the wrapped transaction we executed in May,” he continued.

Furthermore, Choate said, “We are currently assessing market appetite for the subordinated notes, and may consider securing a forward purchase commitment to provide certainty of funding for these classes over several transactions. Overall, we expect all-in pricing in a senior subordinated dealer to be higher compared to our last wrapped transaction due to the higher pricing on the subordinated notes. However, creating capacity on our warehouse lines to support future originations is a top priority for us at this time.”

He explained that the company is in talks with its lenders to renew its prime/near-prime warehouse facility at a bit less than half of its current size, or $400 to $500 million.

“Since we have pulled back significantly on our prime and near-prime originations and are focusing on subprime originations, we will be relying on our $3.25 billion of subprime warehouse lines to support loan volumes,” Choate told investors.

“As of July 31, we had available capacity to fund $1.4 billion of subprime originations,” he reported. “This is enough capacity at our current run rate to fund originations through fiscal-year 2009, provided we have modest access to the securitization markets. We are optimistic we can execute a senior-subordinated securitization in the September quarter and access markets opportunistically throughout fiscal 2009.”

Finally, Choate turned the call back over to Berce for closing remarks.

“The primary issues facing our business are portfolio performance in a challenging economic environment, maintaining liquidity and warehouse borrowing capacity, and accessing the capital markets for securitization transactions. We have taken proactive steps to position the business to withstand weak economic conditions, such as raising cutoff scores, lowering loan-to-value ratios and selectively increasing rates and fees,” Berce said.

“We have also been aggressive in protecting liquidity by lowering origination levels by two-thirds, exiting loan products and markets that were not core to our long-term franchise and reducing expenses,” he continued, saying this are things the company can control in the current atmosphere.

Overview of Financial Results

AmeriCredit reported a net loss of $150 million, or $1.30 per share, for its fiscal-fourth quarter. It reported net income of $87 million, or $0.66 per share, for the same period a year earlier.

For the fiscal-year, the company posted a net loss of $69 million, or $0.60 per share, compared with net income of $360 million, or $2.73 per share, for the fiscal year ended June 30, 2007.

Net loss for the quarter included a $135 million after-tax impairment charge ($213 million pre-tax), or $1.17 per share, related to the write-off of goodwill recorded in connection with the acquisitions of Long Beach Acceptance Corp. and Bay View Acceptance Corp., and a $7 million after-tax restructuring charge

McLEAN, Va. — Capital One and Wells Fargo, two out of three national auto lenders SubPrime Auto Finance News reviewed, reported reductions in origination volume and tightened their auto lending standards during the first quarter.

The last, Chase, interestingly enough, actually grew origination volume. However, all three — Capital One Auto Finance, Wells Fargo Financial and Chase Auto Finance — posted losses, reflecting the turbulent times for the economy.

Capital One

Kicking it off, Capital One Auto Finance posted a hefty loss of $82.4 million for the quarter, which was down from a loss of $112.4 million in the prior quarter.

To align its business with the current environment, the company said it has “significantly” reduced volumes due a tightened credit policy and increased pricing.

“The results of the auto finance business continue to be negatively impacted by both the current credit environment and the company’s credit outlook,” officials explained.

They indicated that, “The company expects its actions to result in a substantially smaller but more stable auto finance business going forward.”

For the quarter, the division’s revenues climbed $15.5 million and provision and operating expenses were down by $29.1 million.

Moreover, Capital One Auto Finance said net charge-offs declined a bit to 3.98 percent from 4 percent in the fourth quarter of the prior year.

However, officials said the charge-offs “increased from 2.29 percent in the first quarter of 2007. Delinquencies declined 142 basis points from the prior quarter to 6.42 percent, but rose from 4.64 percent in the year-ago quarter.”

Originations declined 32.7 percent, or $1.2 billion, to $2.4 billion over the previous period.

As for managed loans, these came in at $24.6 billion as of March 31, down 2 percent from the fourth quarter, but up 2.9 percent from the first quarter in 2007.

Discussing all the company’s business units, Richard Fairbank, Capital One’s chairman and chief executive officer, reported, “We’re well-positioned to navigate near-term cyclical challenges with resilient businesses, experience in managing through prior cyclical downturns and a strong balance sheet.

“We’re actively managing the company to protect our franchises and deliver shareholder return,” he continued.

Gary Perlin, chief financial officer, added, “A substantial increase in revenue margin, coupled with expense reductions largely offset the adverse impact of higher credit costs. Because of the strong capital generation of our businesses, we were able to significantly raise our dividend as planned, while building capital to the high-end of our range.”

Wells Fargo

Wells Fargo Financial also reported that it cut volume in its auto finance business; however, the company apparently fared more positively than Capital One, reducing 31-day delinquencies by 15 percent from the same period last year.

“Lower volume levels in our auto lending business resulted in a 4-percent decline in the portfolio’s average loans over the previous quarter,” pointed out Tom Shippee, president and CEO of Wells Fargo Financial.

The auto finance unit’s receivables/operating leases were down 7 percent to $28.6 billion.

“Delinquencies classified as 31-days-plus on a six-month lag basis improved 15 percent from the first quarter of 2007, benefiting from our commitment to an improved collections process,” he added.

The division’s real-estate business did not do as well, which hurt Wells Fargo Financial’s overall results.

“However, real estate losses continued to increase, consistent with the general condition of the housing market. Real-estate losses in the U.S. debt consolidation portfolio increase to $34 million (0.56 percent annualized loss rate) from $18 million (0.31 percent) in the prior quarter,” he stated.

Moreover, he noted, “Stress in the real estate portfolio affected our credit card customers as well, with loss rates on that portfolio up 16 percent on a linked-quarter basis.”

Overall, Wells Fargo Financial reported average loans of $68.4 billion, up 9 percent from the first quarter. Meanwhile, first-quarter revenue climbed 7 percent from last year to $1.4 billion, thanks in part to higher total loan volumes.

Provision for credit losses was up $158 million, which includes $130 million from higher net charge-offs and $28 million of additional loan provision.

Net income was $97 million, compared with $112 million in the prior year, down 13 percent. Also, non-interest expense declined 5 percent over last year.

“In a challenging economic environment, our net income was lower than the first quarter last year, but increased 24 percent on a linked-quarter basis,” Shippee highlighted, talking about the entire division. “Year-over-year loan and revenue growth, coupled with decreasing expenses — as we continue to aggressively manage costs — was a positive combination.

“Right-sizing our business and proactively managing expenses has helped offset the effects of the general economic decline,” he continued. “Credit losses and delinquencies increased in most of our portfolios, but overall performance was solid despite broad stress in the consumer finance industry.”

Chase

Chase’s Auto Finance division took a hit in net income, coming in at $74 million for the quarter, down $11 million, or 13 percent, over 2007.

However, net revenue was $530 million, up $120 million, or 29 percent, which officials said reflected a reduction in residual value reserves for direct finance leases, higher automobile operating lease revenue, higher loan balances and wider loan spreads.

“The provision for credit losses was $168 million, up $109 million,” executives indicated. “The current-quarter provision included an increase in the allowance for credit losses, reflecting higher estimated losses.”

Additionally, the net charge-off rate came in at 1.10 percent, compared with 0.59 percent last year. Meanwhile, non-interest expenses were $240 million, up $30 million, or 14 percent, due to increased depreciation expense on owned vehicles subject to operating leases.

While the other national lenders reduced originations, Chase Auto Finance actually grew its to $7.2 billion, up 38 percent, from $5.6 million in the fourth quarter and $5.2 million in the first quarter of last year.

Average loans were $42.9 billion, up 9 percent. Including both loans and leases, this number was $45.1 million, compared with $43.5 million in the fourth quarter and 42.5 million in the first quarter of 2007.

Commenting on overall business, Jamie Dimon, chairman and CEO, said, “Our earnings this quarter were down significantly as market conditions and the credit environment remained challenging.

“However, the firm as a whole maintained solid business momentum and our capital position remained strong,” he added.

Looking forward, Dimon reported, “Our expectation is for the economic environment to continue to be weak and for the capital markets to remain under stress. These factors have affected, and are likely to continue to negatively impact, our firm’s credit losses, overall business volumes and earnings — possibly through the remainder of the year or longer.

“However, we are prepared to manage through this down part of the economic cycle, given the strength of our liquidity, credit reserves, capital and operating margins, and to successfully position our company well for the future,” he concluded.

Wells Fargo alerted team members and dealers yesterday that Wachovia Dealer Services will take over the indirect auto lending business for Wells Fargo after the merger between the two companies, which is expected by year’s end.

The combined business will be led by Tom Wolfe, who runs Wachovia Dealer Services’ decentralized regional business center model.

These changes are scheduled as a part of the merger, which is likely to close by year end, subject to approval by Wachovia shareholders.

“After thoughtfully assessing both companies’ models for indirect lending, we believe this structure will take advantage of the economies of skill and talent in integrating our auto businesses. We believe the Wachovia Dealer Services model is the best model to meet all of the indirect auto finance needs of both Wells Fargo and Wachovia dealer customers after the merger,” Wells Fargo said in a statement sent to dealers and associates, obtained by SubPrime Auto Finance News.

“As a result, Wells Fargo indirect auto origination operations in Tempe, Ariz.; Eden Prairie, Minn.; and Chester, Pa., will cease all indirect originations effective Dec. 23. Some jobs will be eliminated at Wells Fargo Auto Finance affecting team members in indirect sales, underwriting and funding. Other Wells Fargo Auto Finance auto business functions — such as auto loan servicing — will remain in these three locations,” the company indicated.

The company explained that it is not disclosing the total number of positions being eliminated because, while a position may be eliminated, it doesn’t necessarily mean the team member in that position will have to leave the company.

Affected Wells Fargo Auto Finance team members will begin a 60-day notice period and may post for positions in Wells Fargo or apply for vacant Wachovia Dealer Services positions after the merger, according to the company’s statement.

“All Wells Fargo Auto Finance contracts that originate on or before Dec. 17 will be funded if received by Dec. 23. Beginning Jan. 1 and after the merger, all loan applications should be sent to Wachovia Dealer Services,” Wells Fargo stated yesterday.

“The combined Wells Fargo and Wachovia direct-to-customer auto lending business will transition to Wells Fargo Auto Finance after the close of the merger and will be led by Bob Hurzeler, who runs Wells Fargo Auto Finance. Other auto business lines within Wells Fargo and Wachovia Dealer Services — including Wachovia’s Warranty Solutions — will remain unchanged until after the close of the merger,” the company concluded.

FORT WORTH, Texas — Higher-than-anticipated credit losses in AmeriCredit’s subprime and near-prime portfolios, compounded by weaker recovery rates, are leading the company to trim dealer relationships, tighten lending requirements, reduce expected originations and cut staffing.

Basically, the company is reevaluating its business and making changes to weather the economic storm after recording a net loss of $19.1 million for its second quarter. However, officials said with the changes in place, AmeriCredit should remain a viable company.

“The December quarter was challenging on many fronts — our portfolio exhibited weak credit performance and uncertainty continues to linger in the capital market,” explained Dan Berce, president and chief executive officer, earlier this week in the company’s conference call.

“With this backdrop, we are taking steps to strengthen our balance sheet and conserve liquidity,” he continued. “We have increased our allowance for loan losses and have implemented a plan to moderate our cash usage by reducing new-loan originations.”

Overall, he indicated that all of AmeriCredit’s key performance metrics declined more than what is seasonally expected during the December quarter.

“While our specialty prime Bay View portfolio continues to perform in-line with our expectations, we experienced higher than expected credit losses in our subprime and near-prime portfolios,” Berce said. “Credit deterioration occurred during the first two months of the quarter and accelerated in December.”

Net credit losses came in at 6.9 percent for the second quarter. However, if Long Beach is excluded, the net losses jumped to 7.3 percent from 5.8 percent in the prior year. The company noted that net credit losses were 5.4 percent in the September quarter.

As for delinquencies, those 31 to 60 days late reached 6.8 percent for the quarter, up from 5.5 percent in the previous quarter. If Long Beach is excluded, this delinquency rate would reach 7 percent, compared with 6.7 percent in the prior year.

Looking at accounts greater than 60 days delinquent, the company said this rate was 3 percent, compared with 2.6 percent in the September quarter. If Long Beach is excluded, the rate would be 3.2 percent, compared with 2.6 percent in the previous fiscal year.

“We continue to believe that there is minimal additional frequency risk related to the expansion of average loan terms to 72 months,” Berce said. “Loans with higher LTVs carry higher potential losses and the increased credit risk of these loans was factored into our decision to originate them. These factors that we have seen impacting our credit performance this quarter were not specific to higher LTV or longer term. They were more macroeconomic in nature.”

Discussing certain struggling areas of the country, Berce said, “Specifically, regional performance in Florida deteriorated significantly in the December quarter compared to previous quarters. Although we have yet to see material deterioration in homeowner performance relative to non-homeowners in this area, this region has seen significant corrections in the housing market and increases in state level unemployment.

“Certain pockets of the Northeast and southern California have also experienced moderate but notable deterioration in performance,” he continued. “Additionally, we have observed a general softness in overall payment rates, which we believe could have been impacted by increased budgetary constraints on our customers.”

With dealers more cautious in buying inventory at auctions due to expected lower consumer demand, the company’s recovery rates were also down more than seasonally anticipated.

The company also said it has completed the transfer of its Long Beach portfolio servicing from Orange, Calif., to the Arlington, Texas, Operation Center.

“This transition was completed yesterday (Monday). We experienced a negative impact related to our integration activities during the December quarter, but expect the adverse affect on credit results will dissipate gradually over the next several months,” Berce explained.

Looking to the future, Berce went on to say that for the rest of the fiscal year, the company is forecasting that seasonal improvement in loss frequency will be offset somewhat by the further deterioration in used-car prices at auction.

“As a result, we expect net credit losses to show some improvement in the March quarter and more significant improvement seasonally in the June quarter,” he stated.

Chris Choate, chief financial officer, then delved into some further details.

“We recorded a $19.1 million net loss for the quarter,” he reiterated. “This loss resulted primarily from an increase in our provision for loan losses. Our provision for loan losses of $357 million covered actual losses realized during the quarter of $286 million, and a $71 million increase in the allowance for loan losses to 5.6 percent of ending receivables as of Dec. 31.

“Provision for loan losses for the quarter was 8.6 percent of average receivables, compared to 5.6 percent a year ago,” Choate added. “Provision for loan losses was $245 million, or 6 percent of average receivables in the September quarter. The increase reflects our expectations that credit losses for the fiscal year will come in between 5.7 percent and 6.2 percent, which is 120 basis points above our previous guidance.”

As for liquidity, Choate indicated that the company had $567 million as of Dec. 31 in unrestricted cash, which is down from $637 million as of Sept. 30.

“The decrease in cash primarily resulted from the funding of $45 million of lease originations in the December quarter and the fact that we did not draw $30 million of unborrowed capacity on our warehouse lines based on available collateral at year-end,” he explained.

“We also have $2.9 billion of available warehouse capacity. As a reminder, our total $5.4 billion in warehouse lines, our two largest subprime warehouse facilities totaling $3.25 billion of credit, will not mature until October 2009. We are in compliance with the warehouse covenants in all our facilities,” Choate said.

He went on to say, “Also, we continue to work on a facility to fund our lease originations and expect to have that in place by fiscal year-end. In the meantime, we have substantially slowed lease originations.”

Returning to Berce, the CEO reported, “As you can see, we are currently faced with two main issues — weaker credit performance that will impact incoming cash flows and profitability in our business and structural changes in our funding platform, primarily the requirement for higher credit enhancement levels in our securitizations.

“Recognizing these challenges, we are reducing our loan origination target for calendar-year 2008 to $5 billion to $6 billion. This translates into loan origination plans for fiscal-year 2008 of $6.5 billion to $7 billion,” he continued.

Touching on Canada, Berce said the company will continue a presence in that country, but will be reducing volume from AmeriCredit’s leasing and direct-lending platforms.

Explaining AmeriCredit’s game plan going forward, Berce said, “We will accomplish our volume reduction through a combination of credit tightening, reduction in the number of dealers we do business with and a reduction of our sales force. We will also consider competitive and regional performance metrics in each geographical area in assessing our appetite in different markets. Relative to our dealers, we will evaluate each relationship based on efficiency, credit performance and profitability.”

Continuing on, he stated, “Over the next several months, we will bring our origination staffing levels and branch count into alignment with our revised origination target. This realignment will include changes that result from the continued integration of Long Beach Acceptance, as well as other staffing reductions deemed necessary to meet the needs of our new target.

“Finally, we expect a small amount of staff reductions within our general and administrative functions,” he said. “We will continue to evaluate our cost structures and look for ways to achieve operating leverage despite lower origination levels and a declining portfolio balance in the near future.”

Company officials made it clear that they expect their outlined changes to work; however, Berce did say, “On the other hand, if the capital markets continue to deteriorate or if economic factors drive even weaker credit performance, we will have to further revise the scale of our operations.”

Providing future guidance, AmeriCredit said it expects fiscal-year net income to come in at $170 million to $195 million.

“We will take a restructuring charge of approximately $10 million over the next two quarters,” Berce concluded.