AmeriCredit Offers More 72-Month Loans, Expands Credit Spectrum
FORT WORTH, Texas — Discussing AmeriCredit's first-quarter results, Dan Berce, president and chief executive officer, said the company has expanded its 72-month term program, in addition to reporting business was off to a "solid" start for fiscal 2007.
"Our primary competitors in the subprime market originate a substantially higher percentage of 72-month business than we do," Berce explained. "During the September 2006 quarter, approximately 54 percent of our loan originations had a 72-month term, and we anticipate that this percentage will increase somewhat in the future."
By expanding the loan terms, Berce said the company will benefit by being more competitive in the marketplace, as well as earning more in finance charges.
"We believe that expanding our 72-month term program is economically advantageous for us — beyond market competitive factors — in that the additional finance charges earned on 72-month term loans is projected to more than offset the increased severity risk resulting from slower loan amortization versus collateral depreciation," he said. "Our historical credit data indicates that default frequency is not materially influenced by offering 72-month terms versus 60-month terms."
The company also noted that is has started covering a broader credit spectrum in several test markets by joining Bay View's prime and specialty prime products with AmeriCredit's traditional subprime offerings.
Discussing the health of the quarter, Berce said, "Our September quarter was a solid, steady beginning to fiscal-year 2007. The key measures for the quarter all showed stability when compared to a year ago, with some metrics showing small improvements.
"Consistent with the trends we see every September quarter, though, we saw seasonality in some of our key statistics with slightly lower loan volume and higher net losses than the June quarter. Our net income and earnings per share increased compared to the same quarter a year ago and has given us a good start to the fiscal year," he continued.
More specifically, AmeriCredit posted net income of $74 million for its first fiscal quarter, compared to net income of $54 million for the same time frame in the prior year.
Loan purchases reached $1.68 billion for the period, compared to $1.73 billion in the June quarter and $1.52 billion in the September quarter, according to executives. These originations included $134 million purchased via the Bay View platform.
"With the exception of a full quarter of Bay View originations, our credit mix remained similar to last quarter," Berce said. "Pricing for new loans in our core subprime platform has also remained stable. Overall, pricing has decreased approximately 20 basis points to 16.4 percent for the quarter when compared to last year, with the addition of full-quarter Bay View originations."
Meanwhile, the company's number of dealer relationships increased a bit to 13,760 for the September quarter when compared to the June period and was up from 12,350 in the prior year, executives reported.
"Loans per dealer were 6.9 for the September quarter, compared to 7.2 for the last quarter and 7 a year ago," Berce highlighted. "The sequential decrease in loans per dealer reflects the impact of normal seasonal origination trends."
Berce also said, "Looking ahead, we expect origination volume to decline sequentially in the December quarter as a result of normal seasonal origination trends. Origination volume is projected to increase in the March and June quarters as is typically the case during this time period."
Delinquencies and Losses
According to Berce, early and late-stage delinquencies and net credit losses followed traditional seasonal patterns, increasing from the June time frame, but up from a year ago.
Looking at 30- to 60-day delinquencies at the end of September, Berce said they came in at 6 percent, compared to 5.1 percent at the end of June and 6 percent last year. Moreover, accounts greater than 60 days past due came in at 2.5 percent, compared to 2.1 percent at the end of June and 2.6 percent in the previous year.
Continuing on, accounts receiving deferment totaled 6.3 percent of AmeriCredit's portfolio for the quarter, up from 6.2 percent in the June quarter, but down from 6.6 percent in the same quarter of last year. Berce also pointed out that some of the company's customers were impacted by Hurricane Katrina last year, which resulted in higher deferments.
As for net credit losses, the company's managed portfolio of these losses grew seasonally during the period to 5.4 percent from 3.9 percent in the June quarter. However, when Bay View's statistics were not factored in, net credit losses for the quarter remained stable at 5.7 percent compared to the prior year, Berce explained.
Also commenting on recovery rates on vehicles sold at auction, Berce said they "moderated" slightly from the June quarter.
"Recovery rates of 48.6 percent for the September quarter were down slightly from 49.9 percent in the June quarter, but they remained strong compared to 45.2 percent a year ago," he reported.
"Historically, recovery rates during the second half of the calendar year are seasonally weaker than the first half of the year due to manufacturer incentives for model-year closeouts, temporary shifts in consumer spending habits to holiday shopping and dealer management of year-end inventory," he added.
For the December quarter, Berce said he expects the company will witness a normal seasonal decline in recovery rates and an increase in net losses.
"For the fiscal year, we continue to expect overall stability in used-car pricing and net credit losses to be between 4.5 and 5.5 percent," Berce said.
Discussing finance earnings, company executives said this income was $484, or 16.1 percent, of average on-book receivables for the period, compared to $459 million, or 16.4 percent, in the June time frame and $374 million, or 16.4 percent, last year.
"The decrease in portfolio yield from the June quarter reflects a full-quarter impact of the Bay View portfolio, which carries lower loan pricing than AmeriCredit's core portfolio," explained Chris Choate, chief financial officer.
Meanwhile, servicing income came in at $7 million for the quarter, as opposed to $13 million in the June quarter.
"Servicing income has declined as our gain-on-sale assets continue to liquidate," Choate said. "Substantially all of the remaining gain-on-sale credit enhancement assets of $24 million will be received as cash distributions during the December 2006 quarter."
In addition to other news, the company said it is revising its earnings guidance from the prior quarter.
"The new guidance includes the gain we have realized from our sale of DealerTrack shares, but does not include any possible future sales of additional DealerTrack shares," Berce said.
"Also, it includes the effect of share repurchase activity through Sept. 30 on net income and earnings per share," he continued. "For fiscal-year 2007, net income is expected to be $325 to $355 million and earnings' per share guidance is $2.45 to $2.65 per share."
Given the results of the first fiscal quarter of 2007, Berce said the company is on track to meet its earnings guidance.
"As we further strengthen our core business through enhanced service levels to our dealers and a broader spectrum of product offerings, we will also investigate potential opportunities and invest in initiatives that will provide new avenues for future growth," Berce explained. "The macroeconomic outlook remains favorable, particularly with continued job creation and steady levels of new unemployment claims. While the competitive landscape is generally rational, the loan-pricing environment is still difficult.
"On this last point, you will recall that on our last earnings conference call in August, we pointed out that it was challenging to maintain, much less increase, new loan pricing in response to higher funding costs," Berce continued. "During the September quarter, despite these competitive dynamics, we were able to successfully achieve our originations objectives while maintaining pricing.
"With funding costs decreasing, we expect stable net interest margin trends on incremental new loans in our core subprime business," he concluded.
New Canadian Credit Center
In other news, AmeriCredit announced it has started originating loans in British Columbia, in addition to the central and northern areas of Alberta. Local sales representatives will work with dealers in these areas, according to the company.
AmeriCredit also said it is opening a Canadian credit center in Burnaby, British Columbia, to better serve dealers in western Canada. The new center is expected to be open by the end of the year and will offer service until 8 p.m. Pacific time.
"Dealers have welcomed AmeriCredit back to the Canadian market," said Howard Cobham, senior vice president of dealer services, Canada. "Our team is taking a deliberate, measured approach with originations, and we are very happy with our progress."
The company's existing center in Mississauga, Ontario, will continue serving dealers in eastern Canada, while the Burnaby center will work with dealers in the eastern Canadian region. Despite the addition of a new center, the company's funding team – based in Peterborough, Ontario – will be in charge of funding all Canadian business.
"We look forward to further developing our partnership with Canadian dealers," Cobham said. "We'll hire more credit and sales representatives as the business grows, and we're also considering strategic alliances."
Currently, AmeriCredit said it works with about 350 dealers in Ontario, Atlantic Canada, southern Alberta, Manitoba and Saskatchewan and plans to expand into the Quebec market in early 2007. AmeriCredit reentered the Canadian market in May 2006.