AmeriCredit Corporation F3Q10 (Qtr End 03/31/10) Earnings Call Transcript

Executives

Heidi Hak [ph] – Communications Manager

Dan Berce – President & CEO

Chris Choate – CFO, EVP & Treasurer

Analysts

John Hecht – JMP Securities

Sameer Gokhale – Keefe, Bruyette & Woods

Bill Carcache – Macquarie Research

Chris Brendler – Stifel

Scott Valentin – FBR

Henry Coffey – Sterne, Agee

Bob Napoli – Piper Jaffray

AmeriCredit Corporation (ACF) F3Q10 (Qtr End 03/31/10) Earnings Call Transcript April 21, 2010 5:30 PM ET

Operator

Good afternoon everyone, my name is Jamie, and I will be your conference facilitator today. At this time I’d like to welcome everyone to the AmeriCredit Third Quarter Fiscal Year 2010 Earnings Conference Call. This call is being recorded. All lines have been placed on mute to prevent any background noise. After managements’ remarks there will be a question and answer period. I will now turn the call over Heidi Hak [ph], Communications Manager. Please go ahead, ma’am.

Heidi Hak

Good afternoon and welcome to AmeriCredit’s third 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 risks and uncertainties detailed in the Company’s filings and reports with the Securities & Exchange Commission, including the Annual Report on Form 10-K for the year ended June 30, 2009.

Forward-looking statements are based on the beliefs of the 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?

Dan Berce

Thank you, Heidi. Just a quick remark, first of all, Caitlin DeYoung is not with us today. She is out on maternity leave. She had a baby boy this past Monday. If you call her regular line for questions you will get taken care of by Chris or me or Heidi.

Anyway back to the script. Our March quarter proved to be exceptionally strong on many fronts. Originations grew to $624 million, credit performance continued to improve, and we earned $63 million, or $0.45 a share. While some of the strength in our key metrics can be attributed to favorable seasonal trends and an improving economic environment, we are also benefiting from the steps we have taken since early 2008 to improve the overall economics of new loan originations.

In our prepared remarks today I will cover our portfolio of credit performance and originations. Chris will then provide highlights of the March operating results and will update you on liquidity and funding.

Now, starting with credit, for the March 2010 quarter we had net credit losses of 7.6%, down from 8.9% last quarter and 7.8% a year ago. We also saw significant improvements in our delinquency metrics with 31 to 60 days delinquency declining to 5.3% at March 31^st, 2010, down from 7.7% at December 31^st, and 6% a year ago. Accounts greater than 60 days delinquent declined to 2.2% at quarter-end from 3.7% at December 31^st, 2009, and 3% a year ago.

Our strong portfolio of credit performance reflected a confluence of positive factors. First, we benefited from normal seasonal improvements and higher tax refunds to consumers. Second, and more significantly, our portfolio continues to shift away from the weaker 2006 and 2007 originations to an increase in concentration of more recent vintages. Loans that we have originated since our credit tightening in the Spring of 2008 are performing much better than our initial expectations and may ultimately perform in line with or better than our 2003 production, which was the best in our history. Finally, we are seeing exceptionally strong used vehicle pricing for our repossessed vehicles.

Recovery rates on repossessed collateral were 44.9% for the March quarter compared to 42.2% last quarter and 39% a year ago. While we had anticipated a modest seasonal lift in our recovery rates in March, the imbalanced supply-demand dynamics within the used vehicle market have continued to help push up used vehicle pricing. Consistent with the Mannheim Index, which reached an all-time high rating in March, we saw extraordinarily strong used vehicle pricing for the month of March. However, with an increase in manufacture incentives on new cards, expected stabilization in the demand-supply dynamics and the adverse effect of the increasing age of vehicles we repossess and sell, we expect to see a moderation in recovery rates for the remainder of the calendar year.

Prospectively, with respect to credit trends the June quarter should bring seasonal trends in credit performance with credit losses improving and delinquencies beginning to rise. Overall, we anticipate sustained year-over-year improvement in our credit metrics the remainder of 2010 and into 2011.

Turning to originations, we originated $624 million of new loans in the March quarter, up from $379 million in the December quarter. The strong sequential increase in originations reflected normal seasonal trends in vehicle sales and loan applications and benefits from the steps we took to rebuild the originations including staffing increases, dealer additions, and more competitive pricing.

The average APRs on new loan originations decreased to 17.1% for the March quarter from 17.9% for the December quarter. Net acquisition fees decreased to 1% from 1.6% last quarter. Other key loan characteristics such as loan terms and loan to value ratios were similar compared to previous quarters. While pricing of these have decreased, loan level returns have remained very attractive due to declining cost of funds and favorable credit development.

We are currently well positioned with respect to loan pricing and terms and although we will continue to closely monitor market conditions, we do not anticipate further notable changes to our loan programs in the near future.

During the quarter, we selectively expanded our credit appetite in certain geographic regions were credit performance and economic conditions showed strength and stability. We will continue to monitor regional performance and economic conditions for further opportunities to increase our approval rates in specific geographic regions.

The number of producing dealers increased to 8100 for the March quarter from 6700 for the December quarter. Our subprime sub venture program with GM continues to be a solid channel for loan originations and made up approximately 10% of our overall originations for the quarter.

Looking ahead, we expect to see a more modest rate of origination growth in the June quarter compared to what we experienced for the March quarter and after that only slightly higher origination levels for the remainder of calendar 2010 due to seasonal factors. Accordingly, we anticipate our portfolio will trough in the 8$.5 billion range later this calendar year.

Competition remains rational and focused on the traditional competitive factors of pricing, loan structure, and service levels. While consumer demand rose nicely during the month of March, demand remains constrained relative to historical levels and continues to be our primary near term headwind as we seek to rebuild origination levels.

I will now turn the call over Chris to discuss highlights of this quarter’s earnings and our liquidity and funding position.

Chris Choate

Thanks, Dan. For the March quarter, we earned $63 million or $0.45 per share. The strong earnings resulted primarily from the significant improvement in portfolio of credit performance and our expectations that those improvements will be sustained. Our allowance for loan losses decreased to 7.1% of the ending receivables from 7.7% at December 31, 2009.

We expect to see continued reductions in the allowance for loan losses through the remainder of calendar 2010 as our portfolio increasingly shifts to a higher concentration of loans originated post credit tightening.

Portfolio net interest margin was 11.4% for the March quarter compared to 10.9% last quarter and 10.8% a year ago. The increase in portfolio net interest margin reflects the impact of higher returns from originations since early 2008. Net interest margin on loans originated during the March quarter were approximately 14%.

Operating expense was 3.4% of average receivables for the March quarter compared to 3.1% for the December quarter. On a dollar basis operating expenses decreased slightly from December to March. The increase in the operating expense ratio resulted from the continued impact of a decreasing portfolio on our fixed cost base. Looking ahead, for fiscal 2011 as the portfolio troughs, we expect operating expenses to be in the mid 3% range slightly higher than the current run rate for fiscal 2010.

Now, turning to liquidity. At March 31, 2010, we had $748 million of available liquidity consisting of $497 million of unrestricted cash and approximately $251 million of borrowing capacity on unpledged eligible receivables. During the quarter, we repurchased $21 million of unsecured senior notes at a 3% discount and recognized a small pre-tax gain of $283,000. Given strong returns from our 2008 and 2009 vintages and the return of capital from the run-off of our 2006 and 2007 vintages, we expect to generate a significant amount of excess cash over the next 12 to 18 months. Our priority will be to redeploy this cash into new loan originations especially when we are able to do so while achieving the historically high loan level returns we are currently seeing.

Longer term, we, along with our Board of Directors, may also evaluate returning excess cash to shareholders through either a share repurchase or dividend program. At present, our restricted payment covenant and our 8.5% Senior Notes indenture would limit our ability to implement any such program until we are able to redeem the notes, which we can do at a small premium in July 2011.

Now, turning to funding. At quarter-end, we had no borrowings on our warehouse facility, which we renewed in February of this year. As expected, the renewal resulted in an increase in the Facility size to $1.3 billion, significantly lower cost of funds and similar advance rate. If fully utilized, this facility can support $1.9 billion of finance receivables.

On the capital markets front, the retail auto securitization environment is favorable. During the quarter, we executed two subprime securitization transactions. Our $600 million 2010-1 Senor Subordinated transaction, which closed in February, carried a weighted average cost of funds of 3.7%. For the first time in over two years, we successfully sold bonds down to the BBB rating level and all series of bonds, including the BBB bonds were over-subscribed. As a result of selling the BBB bonds, initial credit enhancement on the transaction improved to 15% and will build to a target of 23.25%.

Our second securitization of the quarter was a $200 million securitization transaction insured by assured guarantee. This 2010-A transaction was the first insured securitization that we have executed since May 2008. This relatively small transaction provided us insight into investor appetite for bond insured transactions. We are hopeful that over time demand for bond insured transactions will improve and provide us with a viable alternative to Senior Subordinated securitization structures. In the mean time, we anticipate that the majority of our securitizations will be structured as Senior Subordinated transactions.

At March 31, 2010, leverage was 3.8 times assets to equity compared to 4.2 times at December 31, 2009. Although we expect leverage to continue to decline to the mid three times range as the portfolio troughs over the next several quarters, we believe that leverage of five times is appropriate for our business model and achievable over time simply by selling them a capital structure in our securitization transactions to reduce our capital outlay. The successful issuance of BBB-rated bonds in our February securitization indicates that we are making strides in enhancing our leverage position without taking on any additional unsecured debt and its associated refinancing risks.

Finally, a couple of statistics. At March 31, 2010, shareholders’ equity was $2.301 billion and book value increased to $17.11 per share. Also, as many of you are aware, our standstill agreement with Leucadia expired earlier this month. Leucadia holds approximately 25% of our outstanding shares and remains one of our two largest shareholders. They hold two seats on our Board of Directors and we have frequent and ongoing dialog with them. At this point, we are unaware of any plans by Leucadia to change their ownership position.

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

Dan Berce

Thanks, Chris. We had an exceptional March quarter on many fronts and conditions are very favorable as we continue rebuilding our business. The steps we have taken since early 2008 to reposition our loan portfolio for higher profitability are beginning to surface in many of our key metrics from sustained improvements in credit performance to higher portfolio and net interest margin to historically high loan level returns. And these positive developments are amplified by a modestly improving economic environment and a rational competitive landscape.

Finally, the capital markets have rebounded and our loan origination objectives are fully supported by cost-effective access to capital. As with other economic cycles that we have weathered, the optimal period for new loan originations is at the inflection point where economic conditions begin to stabilize and improve. We believe we are that inflection point and thus have a unique opportunity to originate highly profitable loans that will generate solid returns in future years.

I will now turn the call back over to Heidi.

Heidi Hak

Thank you, Dan. As a remainder 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) And we’ll take our first question from John Hecht with JMP Securities.

John Hecht – JMP Securities

Good afternoon, guys, thanks for taking my questions. First of all, just sort of a modeling homework. Was the run-off this quarter just a little north of a billion, which I guess is similar to the prior couple of quarters?

Dan Berce

You mean the net run-off or the – the run-off was probably about –

John Hecht – JMP Securities

The gross – that would be gross run-off

Dan Berce

It was $1.1 billion

John Hecht – JMP Securities

The – and then I have asked you this for a while, but has there been any material change in the makeup of the portfolio, I guess the incremental portfolio that you are originating in terms of the average age or mileage or car type given the changes that has happened over the last few quarters?

Dan Berce

Not, John, from a new organization standpoint. We are booking loans with collateral similar to what we’ve booked in the past. I would say though that because the average age of a note in our portfolio is holder, because the portfolio is shrinking, the collateral backing the entire portfolio would be older now and have higher miles than you might have seen say two years ago.

John Hecht – JMP Securities

But despite that you are still seeing I guess given the markets you are still seeing very strong recovery rates.

Dan Berce

Correct. For where Mannheim is today, we would have – it’s fair to say we normally would have seen 50% plus type recovery rates very easy but the age of the vehicle that we are repossessing and selling today because it is older that’s why it is 45 or 45 and change versus what we might have seen historically for where Mannheim is, yes.

John Hecht – JMP Securities

Okay. Okay, and the next question I mean it’s kind of a broad topic, but you’ve had pretty strong ramp up in the last couple of quarters in terms of your production. And without sacrificing underwriting it sounds like more pricing gain at this point. If I do the math right, you are still able to get pretty high ROEs on the incremental production even after taking pricing down over the past quarter. And I am wondering if may be you can comment on how elastic is the market I mean could you really ramp up production by just cutting pricing a little more or is there some limitation on demand that you just don’t see? And what would it take for you guys to really try to cut pricing and ramp up and – or is it just really you want to focus on ROE?

Dan Berce

Yes. Well we want to focus on ROE. That really drives any volume objectives we might have. I made – in my prepared remarks I did mention that we believe we are now pretty well situated in terms of pricing and don’t intend to change pricing going forward of course that’s subject to changes in market conditions and such but we are – at the pricing levels we are at today we are getting exceptional ROEs. If you – if we are able to repeat the securitization structure from our Senior Subordinated February transaction, that’s five times leverage with the ROEs we are getting, as I said, exceptional ROEs. You know, and from a market standpoint, demand still isn’t there like for car sales or for car purchases demand still isn’t there like we saw two or three years ago. I mean March was much better. April seems to be on a better trend. So we are optimistic that demand will come back. We are well situated pricing wise and so we can hit our volume objective and get great ROEs without making other changes in this way.

John Hecht – JMP Securities

Okay. Thanks very much guys.

Operator

And we’ll take our next question from Sameer Gokhale with Keefe, Bruyette & Woods.

Sameer Gokhale – Keefe, Bruyette & Woods

Hi, thank you. Just a few questions. Dan, you’ve just talked about the originations and the demand side of the equation. As you do your internal planning and forecasting, do you have a sense for where the market in terms of originations is likely to go say for full year, calendar year 2010 or 2011 just because we have seen and you alluded to this in March there was a pickup in annualized origination volumes in your market of subprime used financed vehicles. I think that number annualized is about $27 billion and historically during the peak period we had 50 plus billion of originations in the market. So do you have a sense for when annualized originations could get to the $40 billion or so range on an annualized at this point? I mean is that a 2011 event in your view, is that likely to occur at this point?

Dan Berce

Well we are not necessarily in the business of forecasting global or U.S. car sales. We certainly pay attention to that because that has an impact on our planning, but our view is that both new and used car volumes were unsustainably low in 2009 partly because of just the consumer retrenching, partly because financing sources, especially for less than prime financing had cut back so much. So I think there is a lot of factors that will serve to help the market recover including better financing availability, consumers are in a little bit better shape, the economy is going to recover. We just look for – we don’t look for it to get back to where it was three years ago, but sustained improvement would be nice.

Sameer Gokhale – Keefe, Bruyette & Woods

And you know just following up on Chris’ comments as well, I mean I know both of you talked about making originations a priority, but let’s say we don’t get back to the up the week of may be the ’06-’07 period in originations. It feels like based on your pay-downs in the portfolio you probably have the cash to either pay down your debt like those senior notes and then once you are done paying those down you don’t have the restrictions in terms of the share buybacks from a covenant perspective. So is that the way we should think about it that you keep an eye on origination volumes and based on the current plan and how much you expect your portfolio to shrink and capital base to increase that the plan as of now should be that you pay off the 70 odd billion of these high-yield notes and then pursue a more aggressive buyback program some time in ’12 and beyond.

Chris Choate

Sameer, this is Chris. I think it’s fair to say that we would give a serious look every time that the high-yield debt – in July of 2011, as I mentioned in my remarks, but again beyond that I think we are not willing to commit one direction or the other relative to whether we would be in a position to move origination levels up because the competitive environment is favorable because the consumer demand has come back to a higher level and we can capitalize on that. Or whether neither of those are true and we in fact have the ability to deploy excess capital. We are just a little bit away from being at that fork in the road.

Sameer Gokhale – Keefe, Bruyette & Woods

That’s fair. I mean there do seem to be a lot of moving parts and things that could affect your decision. I guess my last question at this point is you’ve talked about leverage levels where you want to operate the business over time you referenced at five to one is somewhere where you could get to once you shrunk your portfolio enough and the you have – you are under-levered and you get back to the five to one. Now, back in the good old days when you were doing securitization, those wrap [ph] deals where you were levered I think at about between seven or eight to one. If the securitization market and those credit enhancement levels continue to come down, so (inaudible) deals where you are doing them like you did them in the good old days putting in 5% going to 13% credit enhancement. Just to clarify, in that sort of environment, would you still envision running your business at five to one assets to equity or would you at that point be running more like seven or eight to one?

Chris Choate

Again, we do securitization leverage as good or appropriate leverage. If we are able to sell EEE [ph] bonds, if we are ultimately able to sell some BB bonds a little further down the capital structure, certainly to your point we expect or anticipate, maybe I should say, that our enhancement levels below whatever level of bond we sell will gradually come down, then that would really be the type of leverage that we would look at so that the five times leverage assumes generally we are able, as Dan said, to replicate the structure we did in February. If that structure improves to our benefit, then that would certainly be a plausible leverage target at that point for us to run the business at.

Sameer Gokhale – Keefe, Bruyette & Woods

Okay, that’s pretty helpful. And sorry, just the very last question, depreciation expense sequentially declined. Can you shed some color on that and that’s my last question for now, thank you?

Dan Berce

The depreciation includes amortization of loan costs as well. I mean that – it’s not only fixed assets depreciation, but amortization of loan cost. As we’ve run down the portfolio securitization cost amortization is down as well as the cost of our warehouse lines.

Sameer Gokhale – Keefe, Bruyette & Woods

I am sorry; I was referring to the leased vehicle expenses.

Dan Berce

The leased vehicle portfolio is just getting smaller, so we are just incurring less depreciation charges on the vehicles.

Sameer Gokhale – Keefe, Bruyette & Woods

Okay, alright. Thank you.

Operator

And we’ll take our next question from Bill Carcache with Macquarie Research.

Bill Carcache – Macquarie Research

Good evening. Dan, can you talk a little bit about kind of in some of the comments that you made earlier it sounded like – would it be fair to conclude that you believe there is pent up demand out there and so there will be some kind of I guess normalization if you will of demand for new and used cars and that alone would naturally drive some of the origination volume, not just for you, but for the industry as whole, is there fair to conclude?

Dan Berce

Yes, that’s certainly our belief here. And again we are not making forecasts on what normal is in terms of sales but we believe they were unsustainably low. Access to credit especially subprime credit was very, very limited in 2009. That was a factor in certainly used car sales. The scrappage rates in the U.S. I mean for various things I see are 13 million or 14 million units a year and again new car sales of 10 or 11, 12 million would be unsustainable with those [ph] scrappage rates.

Bill Carcache – Macquarie Research

Right. Okay, and you had talked about – you had mentioned last quarter that you were concerned about the demand side and you mentioned that again but you said that you were seeing some positive signs kind of around the March timeframe, so is it fair to kind of glean from that that you are incrementally while still concerned about the demand side incrementally maybe a little bit more positive than you were last quarter?

Dan Berce

Yes, we -- I mean back to the previous commentary, we are seeing some improvement in the rate of car sales. Again, it’s nowhere near where it was a couple of years ago, but things seem to be pointing in a better direction.

Bill Carcache – Macquarie Research

Okay. And then on the funding side, would the goal given the extent to which the securitization markets have been receptive, would the goal, would it be fair to expect a securitization one a quarter? Is that something that you’d be able to speak to or in terms of just guiding us to what we should be looking for?

Dan Berce

Yes, Bill, I think it’s our expectation for this calendar year is that we would do at least one a quarter, we did two this last quarter, and we would look to do somewhere between five and six over this entire calendar year.

Bill Carcache – Macquarie Research

Okay great. And Chris, you had talked about the liquidity kind of it seem like it’s paid roughly the same at about $750 million but it looks like the composition changed. Looks like unrestricted cash represented a greater proportion of that total $750 million. Can you talk about what’s driving that?

Chris Choate

Well, I mean we – yes, Bill, we sort of look at it fungibly as to whether we have cash or whether we borrowed on the receivables. We have more cash at March quarter-end because we did a couple of securitizations during the quarter. So we had less receivables, more cash as of the end of December. We had done those securitizations at least as recently at quarter-end, so we had more receivables less cash. But to us it’s all fungible liquidity.

Bill Carcache – Macquarie Research

Right, right, okay. And lastly, can you give some guidance on the reserve rate that – is that – do you think about it in those terms kind of just what the allowance is with respect to the loan balances throughout the rest of the year?

Dan Berce

I kind of gave probably about the guidance we are going to give on this call which is that we expect to see it continue coming down somewhat gradually as the portfolio continues to turn away from the ’06 and the ’07 vintages to the ’08-’09, 2010 vintages. With the early performance we are seeing on ’08-’09, 2010 loans, I mean our loss expectations are significantly lower than what we saw in ’06 or ’07, which means over a period of time our allowance for loan losses as that turn occurs really has a decent amount of room to move further down.

Bill Carcache – Macquarie Research

Right, okay –

Dan Berce

Exactly what it is at what given quarter end is just – it really not something we are able to necessarily project or even would.

Bill Carcache – Macquarie Research

Right. Well that’s extremely helpful. Thank you very much.

Operator

We’ll take our next question from Chris Brendler with Stifel.

Chris Brendler – Stifel

Hi, thanks, good afternoon. Just – and part of this has already been answered I mean in this part of the call, but can you just opine on the current competitive environment? You did a pretty good job holding your yields and your fees this quarter to fight [ph] the existing originations, but are you seeing any signs of life out of some of your competitors? What do you think an appropriate outlook is say from next year, and if you don’t may be double again in originations, can you give us any idea of what you think the pricing and the ROAs might look like on that kind of business a year from now assuming a steady economic recovery? Thanks.

Dan Berce

Yes. Well, as I said, Chris, we think at least today we are pretty well situated in term s of pricing now. Averages are averages. We exited the quarter at lower pricing than that 17.1 that I mentioned just because pricing came down from the beginning of the quarter to the end. But I think we are in a good spot now and we are – I mean that the market is competitive, there is three, four or five players who are out there, but it’s really quite rational at this point and back to some prior commentary, as long as the market continues to recover in terms of size and consumer demand I wouldn’t necessarily expect much pressure on pricing in the near term.

The steps we took really over the last six months were to be more competitive. We were purposely over-priced to regulate volume.

Chris Brendler – Stifel

Any signs of life out of competitors outside the big four?

Dan Berce

No.

Chris Brendler – Stifel

Okay, great, thanks.

Operator

And we’ll take our next question from Scott Valentin with FBR.

Scott Valentin – FBR

Good evening. Thanks for taking my question. On the originations I was just wondering, has there been any shift at all in the approval rate?

Dan Berce

Yes, it’s up consistent with the fact that our credit appetite in certain geographic areas is more. When we lower cut-offs and we lowered cut-offs in roughly 30 states during the quarter, that’s going to result in a higher approval of the applications we see.

Scott Valentin – FBR

Okay. I mean has it changed dramatically, was it 30%, now it’s 50%, or – ?

Dan Berce

Oh, no, no, no, no, no. It’s improved a few points.

Scott Valentin – FBR

Okay, okay. And then in terms of the origination growth then would you say is it possible to dissect how much is due to the lower cut-offs versus just sheer application volume.

Dan Berce

I mean that’s a bit hard. I mean application volume is – that certainly has a seasonal aspect to it, so we typically see a pretty good increase in application flow. Application flow was – of course it ramps up January, February, March, but if you look at March compared to say December it was up over 50%.

Scott Valentin – FBR

All right. And then you mentioned the cut-offs I guess in some states I think in the past I think it was Florida, you were still pretty tight on your underwriting, just curious if you’ve had any maybe top two or three states where you’ve already changed underwriting standards, either tightened or loosened.

Dan Berce

I mean it’s – I couldn’t single one out as being much – a much more – a much bigger appetite or less appetite. I mean it’s – there is a group of states I mean Texas is kind of leading the way in terms of where we feel comfortable from both the performance and the economy.

Scott Valentin – FBR

Okay and then one last question. The securitization, you had a small securitization that was wrapped, I am just curious as to going forward obviously it will depend on how (inaudible) in you sub and other things, but in terms of the appetite, do you prefer one over the other, senior versus wrap?

Chris Choate

We prefer and I think it’s fair to say generally investor appetite right now prefers Senior Subordinated transactions over wrap deals. So, going forward, while we may look to the wrap market occasionally based on investor demand, our predominant funding vehicle is going to be Senior Subordinated.

Scott Valentin – FBR

Okay, thanks very much.

Operator

And we’ll take our next question from Henry Coffey with Sterne, Agee.

Henry Coffey – Sterne, Agee

Yes, good afternoon and let me add my congratulations, great quarter. How – I guess the simplest thing to conclude is that the shrinkage of the portfolio was a thing in the past and we’ll start to see positive growth?

Dan Berce

Not immediately, Henry. I think most of the – I mean the bulk of decline is done but it’s really going to be towards the end of the calendar year before it turns up again. We are pretty close to the ‘U’ the bottom of the ‘U’ but we have ways to travel before it starts growing.

Henry Coffey – Sterne, Agee

And a lot of it’s just the need for more quality origination volume or better quality deal flow and higher volume levels coming out of the – on the supply side?

Dan Berce

Well, yes, it’s – I mean it’s a whole number of factors. I mean we’ve been re-establishing dealer relationships and that takes a bit of time to reap the benefits of that. Certainly the demand side of – the car market is – was really weak and now it’s just beginning to show some life. Certainly we – our pricing was, as I said before, it was on the uncompetitive side. Now, we’ve moved to be competitive. That’s helped. It’s a number of steps that we’ve taken all of which have benefited, but it’s a marathon not a sprint to get more volume.

Henry Coffey – Sterne, Agee

And do you think your competitors are sort of moving in the same direction with the same appetites because of the liquidities there or – ?

Dan Berce

Well some of our bigger competitors did not cut back like we did and kind of sustained their pricing at competitive levels throughout and sustained their dealer relationships so that they haven’t had to take the steps to rebuild like we have.

Henry Coffey – Sterne, Agee

And then kind of on a – not an unrelated subject, but you talked earlier about use of excess cash. How likely is it that you might jump in at this stage of the game and buy any stock, I know you have done it in the past and I mean if we were probabilities on this how would you sort of weigh those as likely outcomes?

Chris Choate

Henry, this is Chris. I think it’s pretty low probability for 12 to 15 months, at which point there is I’d say a high probability we will seek to retire the high-yield debt that prevents us from being in a position to really consider a significant – a more significant programmatic [ph] approach to dividends or buyback type things. And beyond that – beyond 12 or 15 months down the road it’s really kind of tough to –

Henry Coffey – Sterne, Agee

But clearing out the high-yield debt is kind of a clear priority in terms of using cash?

Chris Choate

That’s a bit of a gaining factor.

Henry Coffey – Sterne, Agee

Right, right. Thank you, and congratulations.

Dan Berce

Thanks, Henry.

Operator

And we’ll go next to Bob Napoli with Piper Jaffray.