AmeriCredit F4Q09 (Qtr End 6/30/09) Earnings Call Transcript

AmeriCredit Corp. (ACF)

F4Q09 (Qtr End 6/30/09) Earnings Call

August 05, 2009 5:30 pm ET

Executives

Caitlin DeYoung - Vice President, Investor Relations

Daniel E. Berce - President and Chief Executive Officer

Chris A. Choate - Executive Vice President, Chief Financial Officer, Treasurer

Analysts

John Hecht - JMP Securities

Chris Brendler - Stifel Nicolaus

Anan Crishan - Core Research and Management

Sameer Gokhale - KBW

Robert Napoli - Piper Jaffray

Presentation

Operator

Good afternoon. My name is Kevin and I will be your conference facilitator today. At this time I would like to welcome everyone to the AmeriCredit Fourth Quarter Fiscal Year 2009 Earnings Conference Call. As a reminder, this call is being recorded. (Operator's Instructions) After management's remarks there will be a question-and-answer period. I will now turn the call over to Caitlin DeYoung, Vice President of Investor Relations. Please go ahead, ma'am.

Caitlin DeYoung

Thank you. Good afternoon and welcome to AmeriCredit's fiscal year 2009 earnings conference call. With me today for the prepared remarks are Dan Berce, President and CEO, and Chris Choate, Chief Financial Officer. Also joining us are Clifton Morris, Chairman of the Board, and Steve Bowman, Chief Credit and Risk Officer.

Before we proceed I must remind everyone that the topics we will discuss during today's call will include forward-looking statements that involve risk and uncertainties detailed in the company's filings and reports with the Securities and Exchange Commission, including the annual report on Form 10-K for the year ended June 30, 2008. Forward looking statements are based on the belief that a company's management, as well as assumptions made by, and information currently available to, the company's management. Actual results and events may differ materially.

We will be posting a transcript of the prepared remarks to our website shortly after we conclude today's call. I will now turn the call over to Dan Berce. Dan?

Daniel E. Berce

Thank you, Caitlin. As you have seen from our earnings release earlier today, we closed out an extremely challenging fiscal year on solid footing. We earned $31 million, or $0.23 per share for the June quarter and $14 million, or $0.11 per share, for the fiscal year.

Subsequent to year end, we successfully executed the first subprime auto securitization done in 2009. Our $725 million 2009-1 transaction garnered significant interest from investors and every note series was oversubscribed allowing us to increase the size of our offering and tighten the pricing of the transaction.

More importantly, we were able to place the subordinated bonds, which were not TALF-eligible, with primarily traditional securitization investors at an acceptable price. Given the volatile and often frozen capital markets we faced over the past twelve months, the fact that we have been able to issue over $1.7 billion in securitization notes over such time reflects positively on the viability of our funding platform.

In our prepared remarks today, I will cover our portfolio credit performance for the June quarter and our outlook on credit. I will also discuss the adjustments we are making to our originations objectives given our cautiously optimistic outlook on the credit markets. Chris will then provide you with an update on our operating results, liquidity and funding.

Now, starting with credit; for the June quarter, credit results followed normal seasonal trends with a modest improvement in credit losses and an increase in delinquencies. Annualized net credit losses were 7.1% for the June quarter, compared to 7.8% for the March quarter and 5.9% for the June 2008 quarter.

31 to 60 day delinquencies were 6.9% at June 30, 2009, compared to 6% last quarter and last year. Accounts greater than 60 days delinquent were 3.5% at the end of the quarter compared to 3% at March 31^st, 2009 and 2.9% at June 30^th, 2008.

Net credit losses benefited from improving recovery rates on repossessed collateral. Our recovery rate was 42.1% in the June quarter, up from 39.0% in the March quarter and from a low of 37.1% in the December 2008 quarter.

Used vehicle values continued to firm during the June quarter as the low level of new vehicle sales limited the supply of trade-ins available for purchase at auction. Additionally, consistent with more typical recessionary patterns, used vehicle sales have benefited as consumers trade down from new car purchases to lower-priced used cars. Looking ahead, we expect recovery rates to remain stable, subject to normal seasonal weaknesses in the September and December quarters. One final note on vehicle values, we have not seen and do not expect to see any significant impact from the changes that are occurring at GM and Chrysler.

We anticipate that our gross default levels will continue to be affected by the prolonged economic weakness and high level of unemployment. The pressure on our portfolio performance metrics will be further exacerbated, over the next few quarters, by a notable denominator impact as our portfolio continues to runoff. We expect our net credit loss rate to peak in the December 2009 quarter.

By March 2010, the majority of our 2006 and 2007 vintage originations, which have been most affected by this downturn and comprise approximately 60% of the current portfolio, should be past their peak loss period and we anticipate that we will see better credit performance overall as our more recent originations become a greater part of the overall portfolio. Lifetime losses on our 2008 and 2009 vintage originations are trending significantly better than cumulative losses on our 2006 and 2007 loans.

Now turning to originations. During the June quarter, we originated $175 million of new loans, down from $210 million for the March quarter. Our focus over the past year has been to originate loans with the highest possible returns, given our volume constraints. We continue to successfully increase pricing and fees during the quarter. The loans we originated during the June quarter carried an average APR of 7.8%, compared to 17.3% for the June 2009 quarter and 15.7% for the June quarter last year.

On a net basis, we also received a fee from dealers of 2.7%, compared to 2.1% last quarter. In contrast, we paid dealers a net fee of 70 basis points during the June 2008 quarter.

Additionally, we have continued to maintain higher credit standards with custom scores on new loan originations again increasing during the quarter. With tighter credit and better pricing, our recent loan originations promise to provide substantially better loan level profitability than our 2006 and 2007 vintage originations.

The success of our July securitization and resulting paydown of our master warehouse facility provides us the confidence to raise our originations targets while staying comfortably within our current funding capacity.

Our goal now is to gradually increase originations to at least $300 million per quarter by December 2009 with continued incremental increases through the end of calendar 2010. The increase in originations will help us maintain scale and arrest the runoff of the portfolio.

We plan to reactivate or sign up new dealer relationships and add marketing representatives to generate higher application flow. We also plan to modify credit standards where appropriate, including marginally lowering credit score cutoffs in geographic regions that have demonstrated consistent or improving credit performance in recent months. We have not and do not plan to ease key underwriting standards such as loan-to-value ratios and verification requirements.

Additionally, we will continue to balance credit risk and pricing on new originations to achieve appropriate risk-adjusted returns, but we do not expect to seek additional pricing increases as we expand origination levels.

I will now turn the call over to Chris to discuss our balance sheet and capital and liquidity position.

Chris A. Choate

Thanks Dan. For the June quarter, we earned $31 million, or $0.23 per share. We recorded a provision for loan losses of $175 million, increasing the allowance for loan losses to 8.2% at June 30, the highest level since the recessionary period began in December 2007.

The allowance for loan losses was 7.7% last quarter and 6.3% a year ago. While the deterioration in the overall economy appears to be slowing or even bottoming out, we expect continued weakness in the job markets to pressure portfolio performance over the near term, especially as we move through our seasonally more challenging second half of the calendar year.

As our 2006 and 2007 vintage originations move passed their peak loss periods in fiscal year 2010, we expect that the allowance as a percent of the portfolio will also reach a peak. And, as we increase loan originations, we will incur incrementally higher provisioning expense associated with new loan production.

Net interest margin for the June quarter was 10.4%, compared to 11.0% last quarter and 10.2% for the June quarter last year. The sequential increase from the March quarter in interest expense as a percent of average finance receivables of approximately 60 basis points was primarily related to the increase in the cost of funds on our master warehouse facility which we amended in March 2009. We expect net interest margin to remain in the 10%-11% range as the significant lift in pricing of our new loan originations is sufficient to absorb the increased cost of funds.

Operating expense was 2.2% of average receivables for the June quarter, down from 2.5% last quarter and 2.3% for the June 2008 quarter. The sequential reduction in operating expenses resulted from a full quarter’s benefit received from the staffing reductions made in the March quarter.

Looking forward, as our portfolio continues to decrease in size and as we look to add staffing to support increased origination levels, we expect operating expenses as a percent of average receivables to move up into the high 2% to low 3% range.

Improved margins and better credit results expected on our 2008 and 2009 originations should result in higher risk-adjusted margins on these new loans when compared to our 2006 and 2007 vintage originations. However, we do not expect operating results for fiscal year 2010 to be comparable to our annualized June 2009 quarterly results due to the reduced level of income generated off of a decreasing portfolio size, the higher operating expense ratio associated with expanding loan originations, and increased provisioning on new loan origination growth.

Additionally, interest expense on our convertible notes is estimated to increase by approximately $6-$8 million per quarter, beginning in the September quarter, resulting from our mandatory adoption of a new accounting standard related to the accounting for interest on convertible notes. While this increase in interest expense will impact our reported bottom line, it is a non-cash adjustment and does not change the amount of interest we actually pay on our convertible notes.

Now turning to liquidity and funding, in July, we executed our $725 million 2009-1 AMCAR securitization which had a weighted average cost of funds of 7.5% and initial credit enhancement requirement of 28.1%. On a leverage-adjusted basis, the cost to finance the receivables funded by this securitization was 5.5%.

The July securitization permanently financed $981 million of receivables and substantially cleared out our master warehouse facility. At July 31, we had capacity on our warehouse lines to fund approximately $1.1 billion in new loan originations. Based on the available capacity in our warehouse lines, it is unlikely that we will access the securitization market again in calendar 2009.

Now turning to liquidity, at June 30, we had $483 million of available liquidity consisting of $193 million of unrestricted cash and approximately $290 million of borrowing capacity on unpledged eligible receivables. During the quarter, we repurchased $24.1 million of convertible notes in the open market at an average price of 58% of par, resulting in the recognition of a gain of approximately $10 millions.

We also amended our leasing credit facility, which was previously scheduled to be repaid in full during the quarter, to provide for a payment of approximately $23 million during the quarter and for subsequent quarterly payments through April 2010 of the $60 million that remains outstanding on the line.

Looking ahead, we expect to maintain sufficient liquidity to support our increased level of originations and the deleveraging of our balance sheet. Included in our forecast of liquidity are the following expectations.

First, as we head into our seasonally weaker September and December quarters, we expect that most of our 2006 and 2007 securitizations will breach performance triggers and begin to trap cash to build to higher credit enhancement requirements. While we expect the cash that we receive from our securitization trusts to be reduced by approximately half, over a period of several months, we will continue to receive cash distributions from performing securitizations because our securitization transactions are not cross-collateralized.

Second, we expect to receive an income tax refund of approximately $200 million by mid-fiscal year 2010 resulting primarily from federal net loss carry backs, and third, the capital released from the continued run-off of our current portfolio will be sufficient to support new loan originations at an increased level, notwithstanding the higher capital requirements on new loans.

As a final note, shareholders’ equity grew to $2.064 billion and book value increased to $15.50 per share at June 30, 2009. Leverage declined to 5.3 times managed assets to equity from 5.9 times at March 31, 2009.

I will now turn the call over to Dan for some closing remarks.

Daniel E. Berce

Thanks, Chris. We are pleased to have been able to report positive returns despite unprecedented economic and capital market conditions that we faced over the past year. Our balance sheet is strong, with over $483 million of liquidity and significant cash generation potential from our $11 billion portfolio.

Our funding platform is stable with sufficient warehouse capacity to support an increasing level of originations, low and declining leverage, and no unsecured debt maturities until September 2011.

With the steps we took to increase pricing and tighten credit against the backdrop of a favorable competitive environment, we are making some of the most profitable loans in our history.

Notwithstanding these positives, for several reasons, we do not expect the level of earnings we achieved in the June quarter to be sustainable throughout fiscal year 2010.

First, as our portfolio continues to runoff in fiscal year 2010, our top line revenue will decline. Second, increased loan production will drive higher upfront provisioning, consistent with our loan loss allowance methodology, which captures 15 to 18 months of expected net credit losses in the quarter loans are originated. And third, we expect our operating expense ratio to increase modestly as we grow originations and lose some scale with the ongoing decline in the size of our portfolio.

In fiscal year 2010, we will continue to focus on maximizing cash collections from our loan portfolio and protecting shareholder value. We are cautiously optimistic about the future and our ability to gradually transition from being on the defensive to becoming more offensive. We have taken the critical steps necessary to maintain liquidity, solidify our funding platform, deleverage our balance sheet, and preserve our franchise, to ride out this economic downturn. The foundation we laid in 2009 will serve us well as we increase our share of the subprime auto finance space in fiscal year 2010.

I will now turn the call back over to Caitlin.

Caitlin DeYoung

Thank you, Dan. As a reminder to everyone, we will be posting a transcript of the prepared remarks on our website shortly after the call. Operator, this concludes our prepared remarks, and we are ready to open the call for questions.

Question-and-Answer Session

Operator

(Operator's Instructions) And we'll go first to John Hecht with JMP Securities.

John Hecht - JMP Securities

Good afternoon, thanks for taking my questions. First, a little bit of homework. Chris, you looked at your tax rate, it was a little higher this quarter. What's a proper tax rate, you think, about you guys on a recurring basis?

Chris A. Choate

Recurring wise, John, 37%-38% would be an appropriate tax rate. This quarter and last quarter, frankly because of relatively modest pretax earnings, sort of normal recurring mostly state-level tax accruals that we have to make no matter what, have caused the tax rate to look a little out of whack.

John Hecht - JMP Securities

Okay. And just to clarify or make sure I get this right, you expect the loan-loss reserve as a percentage of the portfolio to peak. Is that in the calendar fourth quarter of 2009 or was that mid-2010 fiscal year? I guess that would be the same thing.

Chris A. Choate

They're pretty much — I think you've kind of answered it. We didn't give a specific time period, but certainly you're in the right zip code.

John Hecht - JMP Securities

And then you expect to bring originations up to $300 million in that same timeframe and then growing at some rate thereafter?

Chris A. Choate

Correct.

John Hecht - JMP Securities

Okay. And then I guess the question I have is it sounds like you're looking at the last transaction, the TALF-assisted I guess you'd call it, transaction, and the fact that your marginal profitability on that appears to be pretty strong. I guess why would it — and you're getting a tax refund in the next couple of quarters, should we expect that to be the timeframe, or maybe you would revisit the AVS markets and clearout the warehouse again where you do it more opportunistically based on pricing in both the origination markets and the credit markets? Or how should we think about when you really try to ramp up to capture some of these improved economics?

Chris A. Choate

Well really as we said in our remarks we don't anticipate re-accessing the securitization markets in calendar 2009, and that's really largely a function of collateral availability. We kind of cleared out our master warehouse facility with the July transaction. We have a medium-term note facility that at this point we certainly anticipate we would fill up to its maximum extent prior to it going into amortization in October, and thus it wouldn't appear based on our origination objectives that we would have collateral in a sufficient amount to access the securitization markets again until early 2010, sort of counter 2010, sort of independent of tax refund or what's going on with the TALF subscription periods generally.

John Hecht - JMP Securities

Okay. So I guess then we shouldn’t expect you guys to consider, again thinking about the profit opportunity, a massive rebuild in the next few quarters? It sounds like you're going to be a little bit more cautious or a little bit more linear in your growth.

Daniel E. Berce

John, absolutely. We're not in any hurry to rebuild the origination levels that we saw in 2006 and 2007. It's going to be a more incremental process and part of that's a function of the car sales market itself. It's certainly not robust by any means. Part of it's a function that — we drew down our infrastructure quite a bit so it takes a bit to rebuild it and we don't want to compromise credit either. We're still in a recession and seeing a weak consumer.

John Hecht - JMP Securities

Okay, understood. Thanks very much.

Operator

We'll go next with Chris Brendler with Stifel Nicolaus.

Chris Brendler - Stifel Nicolaus

Hi, thanks, good afternoon. Just a followup on that last question, I guess. It sounded like you seem relatively confident about the direction your portfolio's heading, but I mean are you making a statement about where you are or how you feel about the economy at this point? I mean the quandary that we've seen in the last couple of months that we've seen some pretty strong delinquency data, but employment data looks pretty poor at this point, still. I didn't see any trends in your portfolio other than the seasoning effect, which suggests that the worst is behind us.

Daniel E. Berce

No. I don't think we're making that statement. There's only a couple of things going on. The low-level profitability we're generating today, albeit in a weak economy with a weak consumer, is really quite good. We've been able to push up pricing, be much more selective on credit — so even in this type of environment we're very comfortable with the loans we're making and how their outlook for profitability. By the same token though, I'm not sure we have seen the worst in terms of consumer credit. The '06 and '07 vintages continue to be hammered by the environment today, but as they run off, again the 2008-2009 outlook is really quite good.

Chris Brendler - Stifel Nicolaus

Yeah. I guess a followup, in the mortgage space and maybe in the car space the data is not as pure, but we're certainly seeing the problems creep up from subprime into prime. When you talk about the 2008 and 2009 vintage versus '06 and '07, is it just as clear as your credit-score cutoffs are higher or are there other factors that you've isolated that have led to better performance in such a weak economy?

Daniel E. Berce

Well, that is absolutely the one factor that made the most difference. It is the fact that we're originating considerably higher credit scores today than we were for our subprime book a few years ago.

Chris A. Choate

I mean there's other factors, certainly secondary factors like loan to value payment to income, even state level type targeting of volume have all helped improve book.

Chris Brendler - Stifel Nicolaus

Great. Any changes in the competitor environment or is it still extremely fertile ground? And could you disclose the amount of acquisition fees we're getting this quarter? I recall seeing that.

Daniel E. Berce

Yeah. In my remarks — we are getting a net fee now of 2.7%, and a year ago that was a fee payment of 70 basis points so that's swung around quite a bit. There really haven't been any notable developments on the competitive front since our last conference call. It remains — we consider it quite favorable, but no big changes.

Chris Brendler - Stifel Nicolaus

Okay. I guess finally on the securitization market, I guess you use the word cautiously optimistic if you're not really talking about any real growth plans or origination growth plans — material ones at this point. I guess one of the factors — do you think the deal you pursued in July, you could do again, or do you think that there's certain things that could be relatively favorable and you're just not sure you could do it again?

Chris A. Choate

Yeah, our expectation is that we could replicate, in many respects, the transaction we did in July. There are a couple of things going on there. One is that we did see attractive demand for the subordinated notes that we think there is some likelihood that we would be able to replicate that we think and maybe even improve upon the execution in pricing and not on the subordinated bonds. The triple-A bonds that we placed we clearly benefited from the TALF program as far as the pricing we were able to achieve on the triple-A part of the structure, but we did have a nice bit of demand for that triple-A bond from non-TALF for cash investors such that if we were to take a deal back into the market now or — since we don't have the plans to, but if we were take a deal into the market over the near term, we might, even if TALF wasn't there we think we'd be able to get some pretty good demand for the triple-A bonds. Maybe not exactly the same spread level we saw, but still very attractive to us as far as profitability in the longer making.

Chris Brendler - Stifel Nicolaus

Great. Thanks, guys.

Operator

We'll go next to Anan Crishan of Core Research and Management.

Anan Crishan - Core Research and Management

Hi, good evening. I had a question on how you are thinking about the capital structure, specifically I understand they convert in September 2011 so there's still some time, but given the recent stock price performance and given that the stock is now trading above book, and also in light of the attractive returns that you could generate from doing new originations, I was wondering if it makes sense to issue equity or do some kind of tender for the convertibles so that you could get even more liquidity run rate and capitalize on the opportunity to make new originations at attractive returns? So how do you reconcile these competing interests?

Daniel E. Berce

Yeah, sure. Well, a couple of answers. Number one, we do believe it's an attractive environment to originate more loans. With our tax refund coming in roughly midyear and liquidity we already have on hand, a modest equity raise or some type of foray into a convertible really wouldn't, we believe, incrementally add to our ability to originate favorable loans today. So I mean I don't believe an equity raise is in the near future at all.

Anan Crishan - Core Research and Management

But from liquidity, I understand you have close to 500 of dry powder, but your originations are down to like 175, so how does this level of origination have an impact on the long-term franchise value given the dislocations in the market and a lot of your competitors have pulled back? Would it make sense to capitalize on the opportunity and then enhance your franchise value so that longer term you get better returns for your shareholders?

Daniel E. Berce

Yeah, I agree, but we're still in a weak economic environment. I mean there's not clear day light out of there that there won't be a double dip or things won't get worse somehow, so we're cautious about the outlook. I mean that being said, we've said on the call that we were going to push originations to over $300 million for the December quarter. I mean we're at 175 now, that's about double, and we want to go at a very prudent pace, taking into account certainly our liquidity, the completive environment, the economic environment, our infrastructure, the credit profile we're booking. We're going to increase originations at a deliberate pace, but raising equity now wouldn't help us — I wouldn't pace originations growth any faster if we had another couple hundred million of equity. I'd do it exactly the same.

Anan Crishan - Core Research and Management

And I had a question on operating expense, so the $63 million or so, is that a good run rate? How much will that vary as you take originations up to the $300 million or so level?

Chris A. Choate

Well the dollars actually, looking across 2010, will be somewhat flat to slightly down, but the portfolio is obviously shrinking at a fairly rapid rate. So the operating expense ratio, as we said on the call, is going to increase upwards from the low to mid 2% range up to a high 2% low 3% kind of band this fiscal year. And that's again in part because we've got a fair amount of sort of support or fixed-type expenses to be a public company and all, and then we expect to add some expenses on the origination side to help grow loan originations levels.

Anan Crishan - Core Research and Management

Okay. And finally one clarification question. You touched on it briefly, the cash trapping and the securitization. So I just wanted to make sure I understood it correctly. You expect to trap cash in all of the securitizations out there or is it going to be selective?

Chris A. Choate

Well they won't all trap at once. The '06 and '07 securitizations are obviously comprised of collateral that we originated in '06 and '07 which is, as Dan talked to you on the call and as we talked about many times, are a bit weaker in their performance and we expect as we go into the seasonally weaker part of the year here back into the calendar year that a number of those securitizations will begin to hit triggers, but it will kind of stage itself out over time and none of them are cross collateralized so we would continue to see some cash distributions off of certain trusts that aren't trapping at any given month.

And all of that sort of credit forecast, if you will, related to the different trusts, and what we can expect to see distribution wise, what we expect to see distribution wise, is factored into our view of liquidity throughout 2010 and that liquidity obviously underlies our view of how much loan originations we can comfortably do during the year.

Anan Crishan - Core Research and Management

Okay. Thanks, good luck.

Operator

We'll go next to Sameer Gokhale with KBW.

Sameer Gokhale - KBW

Thank you for taking my questions, just a few ones here. Just on the OPEX for the quarter, I know, Chris, you mentioned you had a full quarter benefit this quarter because of the reduction in some of the headcount, but was there a seasonal benefit in the quarter as well because charge-offs dip in the June quarter — it's usually the strongest so maybe your collection activities have to be less intense? I mean for modeling purposes, is there a seasonal benefit we should try to figure into our models?

Chris A. Choate

No, not really. Over the last several quarters, Sameer, we've maintained very robust collection and servicing staffing and there was nothing that happened this quarter that gave us a deficiency benefit from that.

Sameer Gokhale - KBW

Okay. Yeah, I just wanted to clarify because I thought I saw the same kind of trend last year between the March and June quarters so I just wanted to get your sense or your take on that.

The other thing I wanted to ask you was in your recent securitization, and I think you mentioned also 28% up-front credit enhancement and I think that probably builds up to the mid-30s. Now how should I think about that for future securitizations because if I am thinking of this correctly, the rating agencies are the ones that will decide how much you need to have and support below the triple-A level in order to rate the senior most bonds triple-A for the purposes of securitizing those loans and to make them TALF eligible. So doesn't it really come down to how comfortable the rating agencies are with the credit profile of the loans? And if you have to, on a go forward basis, put in 28% up-front credit enhancement building up to the mid-30s, I mean how does the return on equity metric sort of look given that you have such low leverage in your securitizations?

Daniel E. Berce

Well just dealing with the latter part of your question first, with the loan level profitability we're seeing today, even at very modest leverage levels, we believe we're generating ROEs in the 10%-15% range. Now the credit enhancement level that we saw in our last deal takes into account every Draconian factor that exists; a weak economy, the agencies were looking more in our '06 and '07 deals which were originated with different credit standards.

The used-car market, while it's better, it's still not where it was, value wise, two years ago. So I think we have hit probably a trough in terms of the amount of capital we put in as our '08 and '09 deals season and can be looked to more for a performance standard, if you will? I think the enhancement levels will get better. Certainly if the economy gets better that will help. So the 10%-15% that we're looking at today, if we overlaid better enhancement levels on that, it could again be 15% or more.

Sameer Gokhale - KBW

And then how should we think about that within the context of being able to price higher in terms of the yield? I mean if I understand correctly, states have some usury law limitations. Is that based on some sort of spread to a certain interest-rate index or if interest rates rise at some point in time, are you limited in your ability to pass on the interest-rate increases to borrowers at some level? How should we think about that?

Daniel E. Berce

Yeah. Well, it varies from state to state. The usury laws are typically fixed and a lot of it depends on whether it's a new car, a two-year-old car, a four-year-old car. Some states are completely unregulated, but we also have the fee to look to, which isn't part of the usury regulations. But at this point we don't have a concern about usury laws limiting our ability to get the price we want.

Sameer Gokhale - KBW

Okay. That's helpful. Thank you.

Operator

(Operator's Instructions) We'll go next to Bob Napoli with Piper Jaffray.

Robert Napoli - Piper Jaffray

Good afternoon and nice job managing through this environment. I give you guys a lot of credit for that. Just to try to get a little color, the charge-off that you're looking at later this year, you talked about peaking in the fourth quarter of this year — how much of a lift — do you want to give some color on what that is? I mean it makes a lot of sense as the mix declines and certainly new originations become a bigger piece of the pie that charge-offs should decline, but are you looking at 10% kind of as a peak charge-off rate, somewhere in that range?

Daniel E. Berce

I mean without giving you a pinpoint estimate I mean our charge-off rate was 9.5 in the fourth calendar quarter of 2008 so I mean it could certainly exceed that level. But as Chris said in his remarks, by the time we get to March of '10 or mid-calendar 2010, that 2008 and 2009 business will be a bigger part of the mix and the '06 and '07 business will begin to decline in terms of the contribution.

So again, the peak is '09. It would be higher than the 9.5 last year, bu we're optimistic that calendar 10 will bring better numbers comparatively.

Robert Napoli - Piper Jaffray

Yeah. It certainly makes sense that it would be much better, even if employment stays weak. But did you say you're going to build reserves through the end of the year, that you expect reserves to peak in December?

Daniel E. Berce

The reserve percentage — the allowance percentage will probably track the peek in the losses.

Robert Napoli - Piper Jaffray

Okay. And then I mean I was just surprised by your expenses this quarter, how much you improved from last quarter. And there was nothing — and I guess Chris pretty much said that the dollar amount was going to be generally stable, but there was nothing unusual this quarter like a reversal of bonuses or anything like that?

Daniel E. Berce

No, we didn't accrue bonuses (laughter).

Robert Napoli - Piper Jaffray

Okay. Reversed those last year and didn’t do them this year I guess?

Chris A. Choate

This quarter, Bob, was really pretty exceptionally low. I mean we kind of took care of some stuff in the March quarter. We had a full benefit of that this quarter and as you look into 2010 we certainly don't have an expectation of being able to replicate where we ended the June quarter on expenses.

Robert Napoli - Piper Jaffray

Okay. Is it your sense, in the market today — could you if you wanted to, and I'm not saying that you should. I think what you're doing I gradually increasing originations. The markets' not going to go away and I think you're doing it exactly right, but is the market there? I mean is the demand on the borrowing side from quality borrowers there that if you had unlimited capital and the infrastructure already built that you would be able to originate much more than $300 million per quarter?

Daniel E. Berce

I mean in this environment we could certainly, I think, do more than 300, but it's not a situation where we could do a billion like we did when we did a lot more than that. I think that car sale are down, the consumer is certainly retrenched quite a bit. So even if we had unlimited capital I don't think we could get to a heck of a lot higher than what we're targeting for the next six months.

Robert Napoli - Piper Jaffray

I mean your leverage continues to decline. It's a lot and I mean that's the right thing. Do you have a feel for what you can manage leverage to in the long term or is it just we're not really in a period where — I mean you don't know — last cycle the enhancement levels just kept declining and declining. You were able to get up to eight to one debt to tangible equity.

Chris A. Choate

I don't think we'll do that again, period. Again, because I don't think we'll seek to have the senior prime-prime mix we had which helped us get to the eight to one. It would be our strategy to stick to core subprime at least for the foreseeable future, and that's not going to give the ability, in even a better environment, to leverage eight to one. But that being said, our loan level profitability ROAs, just looking at subprime in a subprime market that's less competitive that it has been in many, many years, we should still be able to drive a good ROE with modest leverage.

Robert Napoli - Piper Jaffray

Would you like to keep this company independent? I mean there aren't that many healthy banks, but you guys obviously have a good franchise and skill set, in a market that needs capital. There are a few healthy banks out there that you were part of a much broader organization where they could fund this subprime business with deposits and the business would be able to generate much higher ROEs.

Would you prefer because you can? You feel like you can generate attractive returns over the long term to keep this company independent?

Daniel E. Berce

Bob, I don't think that decision's part of the landscape today and it probably won't be for some time. So I think our primary focus is on maintaining a strong balance sheet, originating good profitable loans and just gradually building our origination platform back up. And if we do our job and are successful on those counts than who knows what happens in two years.

Robert Napoli - Piper Jaffray

Yeah. What is the average cost of debt in the warehouse right now?

Daniel E. Berce

The average funded debt is 6.5-ish.

Robert Napoli - Piper Jaffray

And I mean I think I thought I heard you say that you felt like you might be able to do a non-TALF securitization much in the same structure you did for the TALF securitization. Are you hearing or seeing following in the traditional securitization market?

Daniel E. Berce

It's starting to reappear. The traditional securitization investor is nibbling at deals and as Chris said we had a decent participation of so-called cash buyers. It's hard to say if the market is that healed that we could do a transaction of that size, non-TALF, but we don't need to.

Robert Napoli - Piper Jaffray

Okay, and then just the last question, what was the pricing on the sub bonds on that deal?

Chris A. Choate

Mid 12% when you combine the two tranches. 12.6 I believe.

Robert Napoli - Piper Jaffray

Okay, pretty attractive paper, thank you.

Operator

There are no more questions. I will now turn the call over to Caitlin DeYoung for closing remarks.

Caitlin DeYoung

Thank you. This concludes AmeriCredit's fiscal year 2009 earnings conference call. If you have additional questions, please contact the investor relations department. Thanks to everyone for participating in the call and for your continued support of AmeriCredit.

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