AmeriCredit Sees Results from Bay View, Long Beach Acquisitions

FORT WORTH, Texas - AmeriCredit celebrated the one-year anniversary of its Bay View Acceptance Corp. acquisition during its third fiscal quarter.

Despite the fact that company is still integrating Bay View and Long Beach, officials said they are starting to see the results these new platforms are having on credit performance and origination levels, with more positive results expected going forward.

"Tomorrow marks the one-year anniversary of our acquisition of Bay View Acceptance Corp. and our move toward becoming a full-spectrum lender," pointed out Dan Berce, president and chief executive officer, during the company's quarterly conference call.

"On Jan. 1, we also acquired Long Beach Acceptance Corp., a near-prime auto finance company. Although we continue to integrate these two companies, we are already seeing the benefits of these acquisitions on our credit performance metrics and origination volumes," Berce said.

In fact, during the company's third fiscal quarter, executives said they originated $2.52 billion in loans, compared with $1.74 billion in the December '06 quarter and $1.61 billion in the March '06 quarter.

"Of our origination volume for the March 2007 quarter, $323 million was originated through our Long Beach platform and $175 million through our Bay View platform," Berce highlighted.

"Originations in our core subprime business grew 25 percent to $2.02 billion for the March quarter, compared to $1.61 billion for the March 2006 quarter," he added.

He went on to say the company worked with about 15,240 dealers during the third quarter, up from 13,960 in the December quarter and 13,030 a year ago. Moreover, loans per producing dealer came in at 8.9 for the time frame, compared with 6.8 in the prior quarter and 7.3 for the same quarter in the previous year.

"In our core business, loans per producing dealer were 7.9 for the March 2007 quarter," Berce reported. "The seasonal lift we experienced in originations this quarter was magnified by the additional opportunities to sell Bay View's specialty prime loan products to our existing dealer base, as well as the inclusion of Long Beach origination in our metrics.

"We expect continued improvements in dealer penetration as we complete the integration of our separate sales platforms over the next year," he continued.

Overall, the company's managed portfolio hit $15.15 billion as of March 31, an increase from $14.37 billion (on a pro-forma basis, including Long Beach) as of Dec. 31 of last year.

"We are making good progress on integrating Bay View, Long Beach and AmeriCredit lending platforms," Berce noted. "To date, we have rolled out the Bay View product to 80 percent of AmeriCredit's dealer base.

"We have just started integrating Long Beach and expect that within a year, we will be able to offer our comprehensive full spectrum of loan products through one seamless access point to all of our dealer customers," he said.

Analyzing the overall market, Berce said competition is high, but that he sees it as "rational."

"Loan terms and loan-to-value were relatively stable compared to last quarter, but up from a year ago. On a positive note, the average credit bureau score for our core subprime AmeriCredit originations is now averaging in the 600 range, compared to 580 to 590, historically," Berce said.

As for the company's credit results, Berce said the defaults and recovery rate metrics showed traditional seasonal improvements. Net losses within the company's core subprime portfolio remained stable on a year-over-year basis at 5.2 percent, down from 6.2 percent in the December quarter.

Berce Reports on Mortgage Market vs. Auto Finance Sector

Berce took time during the conference call to note that while the subprime mortgage market has suffered some significant issues, he hasn't seen this impact the nonprime auto finance sector.

"As evidenced by our stable credit metrics, we have not seen a meaningful spillover from issues in the subprime mortgage industry on our portfolio performance," he highlighted. "We continue to see homeowners in our subprime portfolio perform better than non-homeowners.

"We attribute this to several factors: The subprime mortgage industry was characterized by a hypercompetitive environment that encouraged and fostered lax underwriting standards, a proliferation of ever more exotic loan products and a lack of accountability by loan originators for the ultimate credit risk," Berce explained.

"By contrast, the competitive environment in the auto finance space has been stable, and AmeriCredit's underwriting methodology has remained consistent over the past several years. Specifically, we continue to verify income, employment and residency for loan applicants to the same extent depending on the credit profile of the borrower," he added.

Due to the company's verification standards, he said its credit performance can be correlated to employment and job growth and has no relation to any weakness in housing values or issues witnessed in the subprime mortgage industry.

Overview of Business Results

Reviewing AmeriCredit's recovery rates, Berce said they came in at an average of 49.5 percent for the quarter, compared with 48.8 percent in the December quarter and 49.8 percent a year prior.

"Recovery rates have remained firm over the past year, and we anticipate continued stability in the auction market, with normal seasonality," he pointed out.

Overall, AmeriCredit posted net income of $104 million for the time frame, compared with $87 million in the same quarter last year.

For the nine-month period, AmeriCredit's net income came in at $273 million, compared with $227 million a year ago.

Officials noted that net income for the quarter included a $10 million after-tax gain related to the sale of AmeriCredit's investment in DealerTrack and a $21 million adjustment to reserves for "contingent tax positions."

Furthermore, net income for the nine-month period included a $33 million after-tax gain in relation to the company's sale of its DealerTrack investment.

Managed auto receivables 31 to 60 days delinquent came in at 4.1 percent of the portfolio for the quarter, compared with 4.7 percent in the previous year, executives said. Meanwhile, accounts more than 60 days delinquent were 1.5 percent of the portfolio, compared with 1.6 percent in the same period of the previous year, officials said.

Chris Choate, chief financial officer, reported during the conference call that finance-charge income reached $564 million, or 15.6 percent of median on-book receivables for the time frame, compared with $502 million, or 16.1 percent, for the December quarter. A year ago, finance-charge income came in at $414 million, or 16.6 percent.

"The sequential increase in finance-charge income reflects the acquisition of Long Beach on January 1, 2007," Choate said. "The year-over-year decline in portfolio yield reflects the lower margins that Long Beach and Bay View's higher quality portfolios carry."

He also pointed out that the company's annualized net interest margin was 11.4 percent for the quarter, compared with 12.2 percent in the previous quarter and 13.4 percent a year ago.

"The decline in portfolio net interest margin reflects the addition of better quality, but lower margin, prime and near prime receivables," Choate explained. "Net interest margin on the core AmeriCredit portfolio was relatively stable at 12.7 percent for the March 2007 quarter, compared to 12.8 percent last quarter."

Future Guidance

Looking ahead, Berce said the company expects net income of $345 to $375 million for fiscal year 2008.

He said the guidance is based on the following expectations:

—Origination volume of $10 to $10.5 billion.

—Net interest margins of 10.5 to 11.5 percent of average receivables.

—Operating expenses of 2.6 to 3.0 percent of the portfolio.

—Average credit losses of 4 to 5 percent, overall, but varying by seasonal quarter.

—Annualized provision for loan losses as a percentage of average receivables to range between 4.5 and 5.5 percent.

"Our forecast does include the impact of a full year of Long Beach and Bay View performance, which reflects lower loan pricing, lower net interest margins and lower credit losses that are commensurate with the quality of these loans," Berce explained.

"We are also able to carry incrementally higher leverage related to the Long Beach and Bay View assets."

Summarizing the success of the third quarter, Berce concluded by saying, "Origination volume was the highest in our history. Credit results improved compared to last quarter, and our quarterly net income surpassed $100 million for the first time ever."

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