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AmeriCredit Corp. F1Q10 (Qtr End 09/30/09) Earnings Call Transcript

October 21, 2009 | about: ACF

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AmeriCredit Corp. (ACF)

F1Q10 Earnings Call

October 21, 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

Bill Carcache – Fox-Pitt Kelton

Henry Coffey – Sterne Agee

Scott Valentin – FBR Capital Markets

Sameer Gokhale - KBW

Anan Crishan - Core Research and Management

Jordan Hymowitz – Philadelphia Financial

Presentation

Operator

Welcome everyone to the AmeriCredit first quarter fiscal year 2010 earnings conference call. 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 first quarter fiscal year 2010 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, 2009. 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 Berce

Thank you, Caitlin. We had a solid start to fiscal year 2010. We earned $26 million or $0.19 per share for the September quarter. Originations grew sequentially to $229 million and we ended the with $704 million of liquidity. In our prepared remarks today I will cover our portfolio credit performance for the September quarter and our outlook on credit. I will also discuss the progress we have made to rebuild originations and the trends we are seeing in the marketplace. I will then turn the call over to Chris who will provide you with an update of our operating results, liquidity and funding.

Now starting with credit. We experienced normal seasonal weakness in the September quarter and our credit metrics remained pressured by a declining portfolio balance. However, the rate of deterioration in our portfolio appears to be moderating. While 31-60 day delinquencies increased to 7.6% at September 30, 2009 the 20 basis point year-over-year increase was much less than the 190 basis point increase in the same metric from September 2007 to September 2008. Accounts greater than 60 days delinquent also increased 20 basis points from last year to 3.8% at September 30, 2009.

In contrast, we experienced a 100 basis point increase from September 2007 to September 2008 in accounts greater than 60 days delinquent. Annualized net credit losses increased to 8.4% for the September quarter from 7.3% a year ago. The 110 basis point year-over-year increase in annualized net credit losses from September 2008 to September 2009 is roughly half of the increase or deterioration we experienced from September 2007 to September 2008.

Net credit losses continued to benefit from stronger recovery rates on repossessed collateral. Our recovery rate was 42.7% for the September quarter up from 42.1% for the June quarter and 41.6% a year ago. While the Manheim Used Vehicle Index has increased to record levels over the last few months, the strength of our recovery rates has been more tempered because our vehicle mix differs from Manheim’s. The most significant improvement in used vehicle pricing has been in the truck category. In contrast to the Manheim index our portfolio mix reflects a larger share of small and compact vehicles. Additionally, as our portfolio continues to run off the average age of vehicles we repossess and sell through auctions increases. Generally there is an inverse relationship between vehicle age and our auction recovery rates.

Although the constrained supply of used vehicles resulting from Cash for Clunkers and lower trade in volumes has bolstered used car values, we expect some downward pressure on recovery rates as the average age of our repossessed vehicles increases.

Overall, our net credit losses should peak in the upcoming December quarter. By mid 2010 we expect to see sustained improvements in year-over-year portfolio credit metrics as we start to move past the peak loss periods for our more challenged 2006 and 2007 vintage originations. Our portfolio credit metrics will also increasingly benefit from the significantly better performance of our 2008 and 2009 vintages which should ultimately prove to be among the best performing vintages in our history even if economic conditions do not improve.

Now turning to originations. During the quarter we originated $229 million of new loans, up from $175 million in the June quarter. We have taken several key steps towards rebuilding our origination volume. During the quarter we added a significant number of origination staff to increase our presence in lending markets and support additional marketing, underwriting and funding needs. We have also activated or reactivated approximately 3,000 dealers.

On September 1, 2009 we partnered with GM to introduce a subvention program to GM dealers specifically for subprime customers seeking to purchase a new 2009 or 2010 GM vehicle. This program allows us to pass along cash incentives we receive from GM in the form of more favorable rates to customers, maintaining our return objectives and helping GM dealers sell more vehicles. We are increasing our penetration into active as well as previously inactive GM dealerships as a result of this new program.

In general the competitive environment remains favorable compared to a couple of years ago. That said, the remaining players maintain a strong, though rational presence in the subprime space and we must still compete on price, loan structure and service levels. Depressed consumer demand for vehicle purchases also presents a challenge for us as we seek to grow loan originations.

Used car purchases have fallen over 10% year-over-year and the pull forward of demand from Cash for Clunkers to the month of August resulted in weak consumer demand in September and very low levels of new and used car inventory. Loans that we originated in the September quarter carried an average APR of 19.1% compared to 17.8% in the June quarter. On a net basis we also received a fee from dealers of 3.1% in the September quarter compared to 2.7% last quarter.

The average term and structure of loans we originated during the September quarter remained similar to those made in the June quarter. With tight credit and pricing execution we expect the loans we originated in the September quarter to generate high low level returns. Going forward we will seek to maintain these historically high returns as we balance the components driving our profitability; loan pricing and dealer fees, funding costs and expected losses.

Specifically we expect our funding costs to decline if the capital markets and bank lending environment improves and we may pass through the benefits in terms of lower loan pricing and dealer fees. We are still targeting originations of at least $300 million in the December quarter and plan to further grow originations as we move through calendar 2010. However, we remain focused on diligent credit execution and will not compromise our underwriting process to reach volume objectives.

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

Chris Choate

Thanks Dan. For the September quarter we earned $26 million or $0.19 per share. As you saw from our press release earlier today in the September quarter we adopted a new accounting standard that mandates a change in the accounting for our convertible bonds. This change was retrospectively applied and as a result negatively impacted historically reported interest expense on convertible bonds, gain on retirement of convertible bonds and earnings. A summary of changes to these select line items was provided in our press release for each fiscal quarter and for the year-ended June 30, 2009.

This new accounting standard requires us to recognize interest expense on our convertible bonds based on what our borrowing rate would have been at the time of issuance for similar unsecured senior debt without an equity conversion feature which we have determined to be approximately 7%. In order to affect the change in the implied interest rate, we were required to reduce the convertible bonds with the offset going to increase additional paid in capital. Over time the carrying value of our bonds will be accretive back to par value through the maturity date.

As a result, we recognized $5.2 million of non-cash interest expense during the September 2009 quarter related to our convertible bonds. Under this new accounting standard the amount of interest we recognize each quarter will be more than the amount of cash interest that we actually pay on our convertible bonds and the carrying value of our convertible bonds will be less than the amount necessary to repay these bonds. As of September 30 the par value of the convertible bonds outstanding was $462 million and the carrying value of these bonds was $398 million.

Net interest margin for the September quarter was 10.7% up from 10.2% for the June quarter. Interest expense as a percentage of average receivables improved slightly from the prior quarter due to the transfer of receivables from our higher cost master warehouse facility into our AMCAR 2009 one securitization in July and the low utilization of that facility during the remainder of the quarter. Going forward we expect net interest margin to remain in the 10-11% range.

For the September quarter we recorded $158 million in provision for loan losses or 6% of average receivables. The provision for loan losses was 6.1% of average receivables for the June 2009 quarter. Our allowance for loan losses remained at 8.2%. Because the allowance for loan losses is intended to absorb future losses in the portfolio and as Dan noted earlier we expect to see sustained improvements in credit metrics by 2010 we believe that our allowance for loan losses as a percentage of finance receivables may be at or near its peak.

Operating expense was 2.6% of average receivables compared to 2.2% for the June quarter. The sequential increase in operating expense resulted from the addition of staff to support increased origination levels and the effect of our continued run off of our portfolio on our fixed cost base. We expect operating expense as a percentage of average receivables to increase into the low 3% range over time as our portfolio continues to decrease in size.

Now turning to liquidity. At September 30, 2009 we had $704 million of available liquidity consisting of $462 million of unrestricted cash and approximately $242 million of borrowing capacity on unpledged, eligible receivables. During the quarter we received $113 million out of the $198 million of income tax receivable. Subsequent to September 30 we received the remaining $85 million of the tax refund. We plan to maintain a strong base of liquidity and use excess liquidity to fund new loan originations.

Furthermore a covenant in our senior note indenture restricts our ability to pay a dividend or repurchase stock for the foreseeable future. We still anticipate reaching performance triggers in most of our 2006 and 2007 insured securitization trusts as we move through the seasonally weak credit months. While we expect the rate of monthly cash distributions that we receive from our securitization trusts to be reduced by approximately half of the levels we would have expected to receive if the trust did not breach triggers, we will continue to receive cash distributions from senior subordinated securitizations and insured securitizations that have not breached their performance triggers because our securitization transactions are not cross-collateralized.

The revolving period on our $750 million median term note facility ended in mid October and the facility is now amortizing whereby collections from receivables pledged to this facility will be used to pay down the outstanding balance over time. At September 30, 2009 we had no borrowings on our $1 billion master warehouse facility. The capacity on our master warehouse facility combined with our excess liquidity position is sufficient to support our near-term origination objectives and while we do not need to execute a securitization before the end of calendar 2009 we will continue to monitor the capital market conditions to look for opportunities to execute a securitization prior to the expiration of TALF in March 2010.

Also, the revolving period on our master warehouse facility is scheduled to end in March 2010. We plan to commence renewal discussions with our bankers in early 2010 and expect the renewal process for this facility to go smoothly. One last comment on funding, subsequent to September 30 we paid off the $51 million outstanding on our lease facility.

Leverage declined to 4.7 times managed assets to equity at September 30, 2009 from 5.2 times at June 30, 2009. We expect leverage to continue to decrease into the low 4% range by the end of fiscal 2010. We are optimistic the continued favorable performance of our 2008 and 2009 origination vintages will eventually result in decreased credit enhancement requirements and increase our ability to sell down the capital structure and future securitization transactions thereby stabilizing leverage trends.

We believe that the historically asset returns we expect to realize on current loan originations can translate into attractive equity returns with leverage levels seen on our balance sheet today. Finally, a couple of statistics. At September 30, 2009 shareholders’ equity was $2.150 billion and book value increased to $16.13 per share.

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

Daniel Berce

Thanks Chris. Looking ahead as we move into our seasonally most challenging quarter in terms of credit performance we expect weak economic conditions to continue pressuring our portfolio. However, we anticipate that the negative trends in our credit metrics will peak in the December quarter and we will start to see a turn in portfolio performance in mid 2010 as the strong performance of our 2008 and 2009 origination vintages contribute more to overall portfolio performance.

There continue to be significant positive signs of improvement in the auto asset backed securitization market since we executed our securitization transaction in July. Each successive month since our transaction has seen better priced, better executed auto securitizations that have drawn a larger number of traditional, non-TALF investors. We are increasingly confident that the auto ABS market will remain accessible even after TALF expires in March 2010.

Our balance sheet is in the best shape it has been since the beginning of the recession with ample liquidity and sufficient warehouse capacity to support increased loan originations. With the steps we have taken to bolster our origination platform we expect to continue to rebuild loan origination levels in the coming quarters despite relatively weak consumer demand for vehicles.

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 Instructions) The first question comes from the line of John Hecht - JMP Securities.

John Hecht - JMP Securities

I think you mentioned your expectations for the cash trapping have changed a little bit from the last time you spoke about it. Did I hear that right and if so what specifically changed in terms of your expectations for cash trapping?

Chris Choate

No. Nothing really changed. We certainly didn’t intend to communicate any change. We have been saying for some time now we expect our securitization we did in 2006 and 2007 particularly as we go through these upcoming weaker seasonal months from 2009 into 2010 to in all likelihood it hits Level One triggers at some point in time and that would for some number of months perhaps reduce some of our distribution by up to 50% and that is still really where we are.

John Hecht - JMP Securities

The way you look at those and kind of evaluate the trajectories of the metrics within those, does it look like they are going to be kind of tiered out in terms of when they trap or is this all going to take place in Q4?

Chris Choate

It happens over time. They don’t all hit within one month or one quarter. They really will come over several months, several quarters. They will hit us a little bit at a time.

John Hecht - JMP Securities

You spoke about the obvious margins, the incremental margins in this time are very positive. What do you think normalized leverage will be when all the noise is said and done?

Daniel Berce

It is certainly not where we are heading today. We believe the performance of our 2008 and 2009 vintages are tracking. Especially 2009, are tracking the best instances we ever originated which was 2003. If that performance validates through time we would expect our credit enhancement levels on securitizations to improve. How far they could improve is a bit of a wild card. In today’s environment the ratings agencies are extremely conservative. I don’t know how that will change over time. Certainly we think we are entitled to better enhancement levels. All in all Chris mentioned our leverage levels today were 4.7. Probably headed to 4. We think over time we could push them back up to 5 just as a representative number given the type of credit we are originating today.

John Hecht - JMP Securities

You mentioned that you are evaluating the capital markets on a daily basis in terms of readdressing the securitization markets. What factors are you looking for to determine when to specifically go? A side question on that one is how rapidly could you ramp up production?

Chris Choate

Really the key driver on when we would access the securitization markets I think has to do with the scale and the size of the deal we would be able to pull together. We did the $725 million securitization in July. We moved over $900 million in receivables into that deal in July and that pretty well cleaned us out relative to what we had available to securitize. Obviously we are attempting to move our origination levels up but we really aren’t to a place right now where at least on the AMCAR platform where we think we have what we think is a sizeable enough amount of receivables to move into securitization. The market is clearly very favorable. As Dan mentioned it has really gotten better month by month and so the market itself would actually be quite attractive but in all likelihood it is probably going to be after the turn of the calendar year before we have an AMCAR deal to put into the market.

John Hecht - JMP Securities

So it seems the limitation is on the demand side and I don’t mean the demand for securitization paper, I mean the demand for loans. Is that accurate?

Daniel Berce

Yes. That is certainly a constraining factor to increasing volume today. New and used car sales are at levels much, much less than they were 2-3 years ago. The other thing, we are not interested in ramping or quickly increasing originations. We want to do it through re-activating dealers, marketing efforts, hiring people and that all takes time and there is a lead time before we can really get volume “ramped” up again.

Operator

The next question comes from the line of Chris Brendler - Stifel Nicolaus.

Chris Brendler - Stifel Nicolaus

A follow-up question, you gave some color around the competitive environment and obviously your pricing it appears this quarter was fantastic with a yield of over 19 and a fee of 3. Yet you noted that there is a lot of pressure from the overall macro environment for car sales and just not a lot of loans out there. Are you seeing any changes in the margin in the competitive environment? I think you also mentioned there are some serious competitors out there. I guess my bottom line question is do you expect this level of pricing power to continue? I would think no and I just wanted to see if you are seeing any signs of that.

Daniel Berce

There really hasn’t been any change in the competitive environment in terms of pricing structure, credit appetite that we have seen for several quarters now. That being said there are a few big players left in our space and they certainly have an appetite to continue what they are doing and maybe more. The comment we made with respect to pricing, the pricing we got in this quarter is I think the best we have seen since maybe 2001 or highest in terms of absolute levels since 2000 or 2001.

But we have been seeking only those loans where we could get the best price possible so somewhat limiting the market we could address. If a loan we had to give up any pricing on we just let it go. Those loans maybe provide good returns and good quality, as we seek to rebuild origination levels we may try to compete on some of those loans whereas in this quarter and certainly the first part of 2009 we didn’t. We just didn’t want volume period.

Chris Brendler - Stifel Nicolaus

How does that work? You are obviously keeping your credit standards very high so how do you win deals with that kind of pricing? 22% all in when you are keeping the credit standards so high. Do they fall through the cracks?

Daniel Berce

No, most people in auto finance have unique scoring models unlike say the mortgage business where the FICO was thrown out there and it was kind of a generic approval. We certainly have unique approvals in deals. There may be transactions where because of the loan structure it is more attractive to the dealer or the consumer, our approval versus a competitors. There may be dealers that the competitors just aren’t in as actively as we are. There is just a multitude of reasons why we can book loans and get those yields. Again, doing so somewhat restricts the size of the niche we can address because we are not competing on price at all, period.

Chris Brendler - Stifel Nicolaus

I don’t think you quantified at all your guidance or your thought process around originations is. Whether it is going to double or triple or anything like that.

Daniel Berce

All we said is we are still targeting $300 million for the December quarter and we will continue to grow it in 2010.

Operator

The next question comes from the line of Bill Carcache – Fox-Pitt Kelton.

Bill Carcache – Fox-Pitt Kelton

You gave a ballpark indication that you could see leverage ultimately settling maybe or reaching to five times. Can you give an idea of where you would potentially see ROA settling as you kind of look a little bit further out?

Daniel Berce

Historically our business in kind of normal times has gotten a 3% type ROA.

Bill Carcache – Fox-Pitt Kelton

That is where you would as you look out you would expect it would be a reasonable level to settle?

Daniel Berce

We are north of there now for new originations. This is all kind of on a vintage basis which has some assumptions about future credit. We would be north of there now but there are moving parts. If we didn’t see our business model as capable of getting to five times leverage we may then continue to seek the absolutely highest return loans possible.

Bill Carcache – Fox-Pitt Kelton

Separately, there was another sub-prime auto lender that completed a securitization that it sounded like was a wrap deal and I am curious to your thoughts if you think that was kind of a one-off occurrence or whether you think that there may be room for more of that down the road.

Chris Choate

The transaction you are talking about we are not aware of.

Bill Carcache – Fox-Pitt Kelton

I heard talk about Prestige Financial wrapping a subprime securitization with [inaudible] Guaranty. That was in one of the trade industry newsletters.

Daniel Berce

Sorry. That is just not on our radar.

Chris Choate

If that was true it would have been a very small transaction and not particularly extractable to what might be viable for us to look at just kind of where it is relative to their ratings and the size and the marketplace that Prestige would be attempting to address. If that is the case I don’t think that would be any type of precedent for anything we do looking out on the funding side.

Bill Carcache – Fox-Pitt Kelton

As you know there has been an issue surrounding the FDIC position on Safe Harbor protections for ABS investors that could impact some credit card issuers that are bank holding companies. Although you are not regulated by the FDIC I just wondered whether maybe you were concerned about the potential for any type of derivative impact or any kind of market or macro level impact that might somehow influence your business depending on how the issue is resolved.

Chris Choate

I don’t see that particular factor affecting our business. We aren’t regulated by the FDIC but the CFPA could certainly have an impact on our business going down the road as it develops but I don’t think the topic you are mentioning would.

Bill Carcache – Fox-Pitt Kelton

Can you just expand a little bit more on what you are hearing about maybe from a regulatory perspective gaining a little bit more traction in Washington and kind of the risks that you might be concerned about there?

Daniel Berce

There is nothing specific we are concerned about. It is the un-specifics we are because the CFPA depending on how it develops would apply to any consumer lending product which certainly would apply to our product. I haven’t heard any rate caps or anything that would affect the profitability of our business but just the fact that there would be a regulator overlooking consumer finance that would have the power to let’s say classify products as plain versus otherwise. That is just a wild card.

Operator

The next question comes from the line of Henry Coffey – Sterne Agee.

Henry Coffey – Sterne Agee

Your new loans are coming in with a 19% yield and a 3% fee so the total return on those loans is about 20, is that accurate?

Chris Choate

Ballpark yes.

Henry Coffey – Sterne Agee

Can you give us a broader profile in terms of the type of car, size of the loan, the type of credit? I know FICO is not a meaningful score for you all but…

Daniel Berce

The profile hasn’t really changed much. The term of the loan is kind of in the mid to high 60’s still. ¾ used, 30,000 miles. The average loan size is a little more than $16,000. LTV are still kind of hovering in that 110-ish range. Again, very similar to what we have been doing the last few quarters and we don’t track FICO as meaningful in our business but our credit scores, customer credit scores that we originate are pretty close to what we did in the June quarter.

Henry Coffey – Sterne Agee

What was the yield on origination in June?

Daniel Berce

17.8.

Henry Coffey – Sterne Agee

I did hear you say you had paid down the whole warehouse facility.

Chris Choate

It is. There is nothing borrowed.

Henry Coffey – Sterne Agee

There is $1 billion on the balance sheet right now that is now down to zero?

Daniel Berce

No that is the so-called medium term note facility as well as some residuals on our near prime portfolio which both of…that whole $1 million is in amortization. Our only open facility.

Henry Coffey – Sterne Agee

The warehouse facility you have nothing on it now. The capacity to add about how much?

Chris Choate

About $1.4 billion to $1.5 billion.

Henry Coffey – Sterne Agee

Would you do that going into the discussion or would you wait until you got a renewal on that?

Chris Choate

I’m not sure I totally understand. We would seek to do a securitization sometime maybe January or February.

Daniel Berce

We are not going to originate $1.4 billion between now and the time that it is up for renewal which is March. So it is not going to be near full. If we do a securitization it will be empty again.

Henry Coffey – Sterne Agee

What has been the blended costs on your securitization when you look at what you had on the books and what you put on new?

Chris Choate

It is in the low to mid 5% range.

Operator

The next question comes from the line of Scott Valentin – FBR Capital Markets.

Scott Valentin – FBR Capital Markets

In terms of originations you mentioned I think I think 3,000 dealers that were reactivated. I think the peak was about 12,000 or 14,000. I am curious where you stand relative to where it was at the peak.

Daniel Berce

The peak was probably like 18,000. But producing dealers when we say we signed them up that doesn’t necessarily mean we have got a loan from them yet but producing dealers in the quarter which would be the com to the 18,000 was about 4,700.

Scott Valentin – FBR Capital Markets

The GM deal did that add a lot of new dealers to that 4,700?

Daniel Berce

No the GM deal just started in September so it didn’t get much traction between the time it started and the end of the quarter. We anticipate that GM dealer adds this quarter would be more significant.

Scott Valentin – FBR Capital Markets

Could it quickly double the dealer count with GM being added or is that too high?

Daniel Berce

No. The 3,000 included a number of GM dealers that were reactivating but that doesn’t double the 4,700.

Scott Valentin – FBR Capital Markets

I was just curious if the GM network being pretty big if that would rapidly increase the number of dealers. In terms of your guidance on losses you basically said losses will peak in the December quarter which is consistent with seasonality. In terms of the credit metrics going forward I think you said the year-over-year comps should get better by the middle of 2010. Is that both on delinquency and loss basis or just mostly talking about…

Daniel Berce

We are talking losses primarily. Delinquencies, if your velocity going through delinquency is the same you could have the same delinquency but lower or higher losses.

Scott Valentin – FBR Capital Markets

So a little bit higher severity is all factored into that loss expectation?

Daniel Berce

Right.

Scott Valentin – FBR Capital Markets

You mentioned the enhancement levels potentially coming down at some point. Is there any idea on timing? I know you mentioned a range and are being conservative going forward but do you think it is second half of the year in 2010?

Daniel Berce

We wouldn’t even begin to speculate on that. I wish I could but there are a lot of factors involved.

Scott Valentin – FBR Capital Markets

I didn’t know if you had any preliminary discussions or any kind of indication from the rating agencies.

Daniel Berce

Unless we key up a deal we wouldn’t know.

Operator

The next question comes from the line of Sameer Gokhale – KBW.

Sameer Gokhale - KBW

I just had a few high level questions. I would love to get your thoughts on, especially you Dan as you have seen this business through a couple of cycles now and I remember the last time around back in 2002 and 2003 period the issue was cross-collateralization of trusts and that created liquidity issues and you were able to manage through that quite well. Here we are again in one of the worst, or the worst credit cycle and fixed income crisis in history, but from a financing perspective what do you think you can do differently so that investors can get comfortable with investing in a business that is not funded by deposits? Is there something different you are negotiating with your bank lenders in terms of the structure of your credit facilities? Maybe structuring them so that they automatically turn out with no capital requirements or anything along those lines? How do you think about that? How should investors think about the funding models longer term?

Daniel Berce

The credit lines already do term out if they were to expire. We currently don’t have the risk of bullet maturities if you will in our business.

Sameer Gokhale - KBW

Don’t you lose the capital also associated with that also if they are not renewed? [overlapping speakers]

Daniel Berce

No they become a mini securitization and capital would be released.

Sameer Gokhale - KBW

Is that released to you over time or is that released back to you when it does pay off?

Daniel Berce

Yes, over time.

Sameer Gokhale - KBW

So do you in terms of requirements as far as putting in new receivables into those facilities, taking out delinquent receivables from the facilities that can create some liquidity challenges as well. Do you envision any changes to the structure of your credit facilities that would help protect you in the event that down the road there is another kind of deterioration in the credit markets?

Daniel Berce

Number one, we were able to maneuver through this environment and we are on the other side I think from a balance sheet standpoint and are in pretty good shape. There are a hell of a lot of financial institutions that didn’t do that. Banks, deposit funded and otherwise. I’m not sure our “funding model” is fatally flawed in any shape or form because we maneuvered. Our business is a matter of managing origination levels up or down and in times where credit is terrible and the capital markets are tight we are just going to have to batten down the hatches again like we did this time. We will sit down with our bankers and we will continue to sit down with our bankers and figure out better ways to structure our credit facilities. I think the structures we had this time around both for credit facilities and securitizations without cross-collateralization we are much sounder and safer than we had 5-6 years ago and we are going to take the same thoughtful approach to our funding model in those facilities in the next few years. I don’t think the fact that we are a securitizer and a warehouse funded model is necessarily bad especially given the fact we can get terrific returns in our business in cyclically good times.

Sameer Gokhale - KBW

I understand that. I was just wondering if there was any color about changing the funding structure. It doesn’t sound like there is anything big coming down the pipe or needing to come down the pipe on infrastructure.

Daniel Berce

Again, we are going to be creative. Our bankers are going to be creative. It is something we will address with them between now and the expiration of the facility in March. Bankers are creative. They have had a lot of good ideas already.

Sameer Gokhale - KBW

Obviously you talked about your leverage. You talked about the return on assets but based on your book value per share and if one were to assume 15% ROE obviously your earnings number is in the $2.30 range. Do you have a timeframe in mind by which you could expect to get to an annualized run rate close to that you can talk about today?

Daniel Berce

Nope. We don’t do earnings forecasts. That wasn’t a smug response but we don’t do forecasts.

Sameer Gokhale - KBW

In terms of the operational structure I know awhile back you had closed a number of locations around the country and I think now you have talked about adding more staff. Is there a plan to reopen those offices in the near-term? What are you planning with regard to that?

Daniel Berce

We downsized our credit center network to 13. We are going to reopen one that we feel we need from a geographic standpoint so that will be 14 but the model is a little bit different than it was when we had 60, 70 or 80 and by necessity. If any more dealers expect us to be open 9 to 9, 6 and in some cases 7 days a week, when we had the smaller offices there might have been 6-8 people and it was really hard to cover the hours necessary in that size location. What our strategy is to have a more limited number of set offices. 14, and it could trickle up a little bit, have a broader staff in each office to that we can cover all the hours necessary to service dealers. We do have the marketing reps that cover the country. All of them aren’t in those 14 markets. Many are in markets that we don’t have a physical brick and mortar presence. We think the footprint we have now with the expansion of staff is one that we can springboard back up into the billion a quarter type origination very easily.

Sameer Gokhale - KBW

Historically or even last time you went through the cycle or similar sorts of trends you de-levered and then eventually you were able to ramp up originations so the talk back then was AmeriCredit potentially being an acquisition candidate. I am not going to ask you about whether or not you would be willing to sell the company but what I think would be interesting to know is given that you bought Bayview and Long Beach and those in hindsight may not have been exactly as you would have hoped, would you be on the lookout for additional acquisition opportunities even going further down the credit spectrum at some point [inaudible] or is that something you are completely ruling out at this point and you are going to stick to your knitting in the B&C type paper?

Daniel Berce

For the foreseeable future we are just going to be sticking to our knitting. We made those acquisitions in very different times when we were already originating 2 billion a quarter. We are far from that now. We think organically from where we are at today there is a tremendous amount of rebuilding we can do on our own.

Operator

The next question comes from the line of Anan Crishan - Core Research and Management.

Anan Crishan - Core Research and Management

I have a question related to OpEx following up on the previous question. I am trying to get a sense of the run rate. If you look at last quarter you were running at $64 million per quarter. It has picked up to $69 million. This time you did do some expansion related to origination capacity but is this a good run rate to use on a go forward basis?

Daniel Berce

It is pretty close. We would likely have a small increase in dollars, a few million quarter-by-quarter as we go through the balance of the fiscal year. We really spoke in terms of having our percentage move up towards kind of a 3% number by the end of the year. $69 million maybe a few million bucks up for each of the next 2-3 quarters would get you to kind of that upper 2-3% number.

Anan Crishan - Core Research and Management

You do have that kind of denominator ticked up.

Daniel Berce

That is clearly what is driving the increase in the percentage.

Anan Crishan - Core Research and Management

On the tax refund, it seems like you managed to get it earlier than what you were indicating. So you now have got all of what you were looking to get or is there something else that is in the works?

Daniel Berce

We got every bit of what we expected to get.

Anan Crishan - Core Research and Management

On tax rate, it came in higher in the 44% range. You were indicating 37-38% so that will even out as the year plays out?

Daniel Berce

It is likely to be more of 39-40% for the year. There is still stuff in that overall tax rate that relates to kind of state level accruals and adjustments we make on an ongoing basis that to a certain extent because we have a relatively modest amount of pre-tax income and we have a sort of fixed dollar amount of state level types of accruals and adjustments we make it is just going to push that tax rate a little bit up from what I think we may have communicated the last couple of quarters.

Anan Crishan - Core Research and Management

You indicated about leveling off of credit losses and showing some improvement as you get into the first half of next calendar year. What economic assumptions are you making? I think you mentioned you expect the economic conditions to be still tough but what can go wrong from an economy standpoint that will cause you to kind of miss on this outlook?

Daniel Berce

Economically our belief that credit will turn midyear next year is based on the economy still stumbling along like it is today. If we saw a tremendous downturn from here in say the job market that would certainly cause us to change our forecast.

Anan Crishan - Core Research and Management

When you look at the banks’ credit portfolio you are seeing that more of the prime loans are starting to show cracks because of the economic situation.

Daniel Berce

Interestingly, subprime and I am speaking about auto, shows the first signs of weakness and it has been rippling through to prime portfolios but when you look at start to finish, the beginning of the recession to where we are at today, the actual percentage increase in losses on prime portfolios was greater than subprime like ours. Now in absolute terms there is higher losses but percentage wise they have been hurt more.

Anan Crishan - Core Research and Management

So you feel comfortable, based on the assumption we kind of head on at current levels without any material deterioration?

Daniel Berce

I am as comfortable as I can be with that assumption.

Operator

The next question comes from the line of Jordan Hymowitz – Philadelphia Financial.