CompuCredit Q1 2008 Earnings Call Transcript

May. 7.08 | About: Atlanticus Holdings (ATLC)

CompuCredit (CCRT) Q1 2008 Earnings Call May 7, 2008 5:00 PM ET


Jay Putnam – Director of Investor Relations

David G. Hanna – Chairman and Chief Executive Officer

J. Paul Whitehead, III – Chief Financial Officer

Richard R. House, Jr. - President


Sameer Gokhale – Keefe, Bruyette & Woods

Carl G. Drake – SunTrust Robinson Humphrey

John Hecht – JMP Securities


Welcome to the CompuCredit first quarter 2008 earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Mr. Jay Putnam, Director of Investor Relations.

Jay Putnam

Good afternoon and thank you for joining us for CompuCredit Corporation’s First Quarter 2008 Earnings Call.

Before we get started I would like to remind you that some of our comments today will be forward-looking statements. These forward-looking statements include all statements of our plans, beliefs, or expectations of future results or developments, such as the performance of our credit card receivables, including account growth, net interest margin, other income and delinquency and charge-off levels, interest performance and payment rates, acquisitions of portfolios or other assets, price expectations for our business segments, our expected levels of marketing expense, our earnings expectations, our liquidity level, and capital raising plans, the impact of proposed legislation and regulations and general economic conditions.

For information regarding some of the more important factors that may cause actual results to differ materially from those reflected in the forward-looking statements that we make today you should read the Forward Looking Information Section and the Risk Factors in our Form 10-Q for the quarter ended March 31, 2008.

Thanks again for your interest in CompuCredit. Please feel free to contact me if you every have any questions you would like to discuss. You may also access our website to obtain a hard copy of the press release and our financial statement to view our risk factors or to look into an archived version of this call.

At this time I will now turn it over to David Hanna, Chairman and CEO, of CompuCredit for his remarks.

David G. Hanna

I will spend a few minutes giving you our current outlook, as well as reviewing the financial results for the quarter. J. Paul Whitehead, our CFO, is here to discuss our financial results in greater detail and after that we will take questions. Rich House will be joining us today, as well, to answer any questions you may have about the asset quality within our portfolios.

Before I get into the specifics of the quarter, I want to give you some of our thoughts about the current environment for a specialty finance company and our company in particular.

As those of you who have heard us speak about our operating strategy know, we truly do focus on long-term value creation rather than short-term gains. You have heard us speak about trying to ensure that we know where our funding is going to come from for growing our portfolio, looking out some 18 months into the future. We think this is the most prudent approach in light of the unprecedented dislocation in the securitization market that we have seen over the last several months.

The fact of the matter is that the way in which we have financed growth in the past may not return in the future. We believe that there will be other sources of funding but the traditional way we have financed our business growth may not be there in the future. Therefore, over the last few months we have been in a position of focusing on getting our business and our portfolios to a cash flow and positive position. As J. Paul will discuss, this has included reducing some costs, as well as reducing marketing dollars, going out.

A lender that starts shrinking in size should see improving cash flow from their business model. A lender like CompuCredit should see that turn even quicker. The short duration and average life of credit card assets, especially those in the lower tier, enable us to realize this type of de-leveraging of the portfolio much quicker than more traditional lenders of longer average life assets may see.

To that end, we ended the first quarter with $184 million of unrestricted cash, or $3.84 per share, versus $108 million at the end of the year. We have cut numerous costs but we are still in a position to turn back on a growth engine for new accounts if the lending market improves. During the latter half of this year we will look to further reduce costs and overhead if we have not seen an improvement in the funding market.

Our first priority is to ensure that we can realize the book value of businesses and our portfolios, which as of the first quarter stood at just under $800 million and over $16.50 per share. We think that we can achieve this without any new leverage in the business. Our approach over the coming months will be to continue to focus on de-leveraging and moving to cash flow positive across all portfolios.

We continue to have cash available for a portfolio purchase, which we believe is somewhat likely during 2008. To date, most banks that might have an interest in selling credit card assets have been more focused on raising large amounts of capital at their corporate levels.

We are hopeful that these capital raises will now give them the opportunity to try and reduce their exposure to assets that might have started as prime assets but have degraded into the sub-prime space. These are the types of assets that we have historically been able to do well with, as our specialized servicing and account managing tool enable us to succeed more that companies that have their strategies focused on a higher-tiered customer base.

It is notable that our capital ratio is at a very attractive rate in terms of a conservative approach. We have capital to assets of over 20%. It is not a lack of capital that keeps us from growing, it is a lack of certainty of debt to fund the new receivables in the future. This certainty of funding has been easier to attract over the years, with liquidating pools rather than open-ended pools of loads.

That is why we might look to purchase portfolios rather than to organically grow them. We have been looking, and continue to explore alternative means of funding our business moving forward. We are hopeful on these fronts but we would bet the future until we know that there is a solution.

Now let me move to the quarterly results. This afternoon we reported first quarter 2008 results and on a GAAP basis we posted a net income of $2.5 million, or $0.05 per share, compared to a net loss of $2.5 million, or $0.05 per share, from last year’s first quarter.

First quarter GAAP earnings from continuing operations were $5.5 million, or $0.12 per share, as compared to GAAP earnings from continuing operations of $2.1 million, or $0.04 per share, for the first quarter of 2007.

On a managed basis, we reported a net loss of $105.3 million, or $2.25 per share, as compared to a net loss of $9.5 million, or $0.19 per share, from last year’s first quarter.

The first quarter’s managed loss from continuing operations was $101.7 million, or $2.17 of managed loss per share, as compared to $4.7 million of managed net loss from continuing operations, or $0.10 managed loss per share, for the first quarter of 2007.

We ended the quarter with approximately $3.8 billion in managed loans, down from $4.1 billion at the end of 2007. J. Paul will discuss in some detail the delta between the managed and the GAAP numbers.

As expected, we experienced heightened charge-offs in the first quarter due to changes in our marketing efforts. This is due to the vintage effect of the huge growth that we had last year and the resulting charge-off eight to nine months later that we are now seeing. It’s something we have experienced in the past as well, when marketing levels have dramatically changed. We expect that this will continue to cause a managed loss in the second quarter, with return to managed profitability during the second half of the year.

When comparing account performance at a vintage level, that is looking at accounts booked in a particular month and comparing their performance against those monthly vintages of accounts booked across our 10+ year history, we are pleased with how our current portfolio is tracking and it is something that we monitor daily.

As you all may know, we have nine distinct portfolios that we track and the trends give us confidence about the portfolio performance moving forward. During our high growth mode, we have tested into certain segments that do not perform to the standards that we expect and we have included that line into our approach for credit card growth in the future when liquidity returns.

We are pleased with our vintage performance levels and what those performance levels tell us about the opportunities to originate and grow in the current environment. All premised however, on availability of the liquidity necessary to growth. Our vintage level confidence and our early stage delinquency and roll rate improvements can be illustrated by looking at our lower-tier credit card portfolio, which is about $1 billion.

There is a 20% year-over-year improvement in the early stage delinquencies, or accounts 31-90 days delinquent. There is an approximately 50% reduction in early-stage delinquencies at the end of the first quarter when compared to the end of November 2007, when early-stage delinquencies peaked. Thus, any delinquent receivables generated by the large vintages of the second and third quarter 2007 account additions have moved through the delinquency buckets and either charged off in this year’s first quarter or we will charge-off in the second quarter.

This data also suggests that our customers’ credit outlook is somewhat better here in the beginning of 2008 than it was at the beginning of 2007. While we think a significant general economic slowdown would result in an increase in unemployment rate, which likely would hurt our customer base, we haven’t really seen that so far.

Because we are pleased with the performance at the vintage level, we obviously would like to be originating at higher levels. However, we will not grow beyond our current pace until we are confident that we have additional funding in tow. That said, we have adequate funding to support our current marketing programs and we can ramp up quickly with an improvement in the capital markets.

During the last slow down we experienced with our originations in 2002, we were able to purchase credit card portfolios to supplement our growth and to earn our desired return hurdles. To date we have purchased over $6 billion in receivables and consider each deal that we have done to be successful. We are actively pursuing purchases of credit card receivables and our last completed transaction remains the $970 million portfolio we purchased last April from Barclay Card.

As our first foray into the UK, the Barclay Card deal has performed well in its first year and we leveraged on this acquisition and began testing their origination of credit cards in the UK on a small scale at the beginning of this year. We have over 250 employees working on our behalf in the UK and we now have the critical mass to grow this business. As the capital markets move toward the norm and liquidity improves over time we have high long-term hopes for a UK credit card business since it is similar to the U.S. market, though less competitive.

Many of you may have been following the credit card bill of rights proposals in Congress and the proposed credit card regulatory guidance issued by the Fed and other regulators last week. While few of us in CompuCredit or elsewhere within the banking and financial services industry would argue for more regulation and the impediments such regulation creates in the free-market process between lenders and consumers, we are not overly concerned about our ability to adapt to any changes in the regulatory landscape as long as the rules apply equally to all market participants.

Many of the current legislative and regulatory proposals include elements that have long been part of our account management practices here at CompuCredit. Other initiatives represent changes that we already have made to some of our marketing and other practices based on ongoing discussions with regulators. We think that in general, price controls set by the federal government have proven to cause great disruptions in the market for delivering any products and services to consumers.

The most recent example of this was when the Congress changed the pricing for guaranteed student loans, thinking it would be helpful to the end consumer. We all know now that the federal government made the product unprofitable for companies to lend at the new rates and most of the larger players have abandoned that sector. Now, after changing the pricing only last year, Congress is hastily trying to fashion a solution so that the huge number of new college students this year will not be left without a way to fund their education.

We think that price controls on credit card products would cause a large reduction in credit available to a large portion of the American population.

Moving away from credit cards, our debt buying and balance transferring business, Jefferson Capital, continues to flourish with $16.1 million in pre-tax GAAP income for the first quarter of 2008, a 40% increase over last year’s first quarter. Much of Jefferson Capital’s income growth relates to its heightened level of purchases of our credit card segments lower-tier credit charge-offs given their peak vintage charge-off levels and its sale of those charge-offs to Encore Capital under it’s five-year forward flow contract with Encore.

With an increased supply of charge-offs in the marketplace, generally improvement products and practices, Jefferson Capital is well positioned to be leading player in this attractive market for years to come.

Our retail micro loan storefronts generated $4.4 million in pre-tax GAAP earnings from continuing operations for the first quarter. But these operations have disappointed us when base lined against what we were hoping for strategically in getting into this business. The segment continues to undergo major changes. Last quarter we marked over 100 storefronts as available for sale and we are still actively pursuing the sale of those stores.

Also, at the end of April, we executed a sale of our 81 Texas locations. After removing the Texas stores and 104 locations from the six states that are still held for sale, we now operate 325 retail storefronts in eight states and the UK.

From the very beginning our plan was to offer the customers, using these products, many more options that they had had in the past. Our belief was that by doing this we would reduce our cost of credit and build this business as a consumer-friendly provider of various products and services. Unfortunately, many in the public policy arena shifted from desiring more options for consumers to actually opposing additional products. We had good traction with our multi-product offering in stores, particularly in Texas. But the regulatory environment has limited our product offering and we now are focusing on doing business only in states where the mono-line product still makes sense for us.

We will continue to monitor performance by state and by store to maximize returns in our remaining locations and we will continue to respond to changes in the regulatory climate and the potential of any such changes to affect our ability to earn our desired returns within our storefronts.

Moving on to our auto finance segment, we posted a GAAP loss of $3.8 million in the first quarter due to the fixed costs reoccurring with our Just Right Auto Sales retail locations and with our ACC lending operations as we ramp up these early stage business activities, unfortunately, now at a much slower pace than we had planned given uncertainties in the capital markets.

Also, since our auto loans are all on balance sheet, we have high provisions for loan losses given the build up of allowances associated with our growth in auto loan originations.

The auto lending industry has been extremely competitive over the last couple of years and the current liquidity environment has weeded out over-aggressive lenders. We have tried to ensure that we only make loans in the auto finance business that we can make money even in an economic downturn and we hope that we will be able to obtain the right levels of funding within this segment at attractive pricing and terms that will allow us to expand in this space and fully absorb some of the fixed infrastructured costs that we have incurred to get to scale within this business.

Historically, these businesses have had attractive growth opportunities in economic downturns. We now the consumer demand is strong right now and the pricing is right, but we will only grow when we know there is funding available for that growth.

We also are growing cautiously within our MEM UK online micro loan operations in our other segment. Since our acquisition of this business, we have experienced strong marginal IRRs on our loan investment within MEM and the recent implementation of our credit card segment’s vintage base underwriting discipline into this business has served to significantly improve these IRRs. While capital and liquidity are obvious constraints to growth within MEM currently, we note that the cash-on-cash returns within MEM are quite high, given the short-term duration of its loans and the high cash returns on its loans. As such, it is possible to grow this business at a reasonable growth level without huge amounts of capital.

We should also note, however, that growth in this business will result in GAAP earnings pressure for us, as it did in the first quarter of this year, given our need for providing loan loss allowances on balance billing. Loan losses are quite high in MEM’s products, but so are the yields on these products. Under GAAP MEM’s receivables are valued on our balance sheet by accruing for the loan losses without ascribing any asset value to the significant yield on these receivables.

As my comments thus far have evidenced, we have taken decisive actions within all of our business segments to help ensure the long-term success of our business. Our focus now is almost exclusively on preservation of our book value so as to allow for strategic portfolio purchases, as well as to admit the ultimate creation of long-term value as the liquidity markets sort themselves out.

To this end, we have reduced marketing volumes, sold or closed storefronts, sublet a large amount of office space, optimized expenses, and discontinued lending activities that did not meet our desired return hurdles. While some of our actions impose short-term pain, they are clearly necessary in the current environment to preserve the value that we have worked so hard to create.

Despite the various challenges pertaining to the credit markets, we remain enthused about the business opportunities we see. In our 10+ years at CompuCredit we have made more money from decisions made during economic downturns that at any other time. These are the times when we should be looking for great investment opportunities, and we are. We remain very excited about the future of CompuCredit and will continue to act diligently and decisively for the collective benefit of us all.

Thanks again for joining us this afternoon and for your interest in CompuCredit. I will now turn it over to J. Paul Whitehead for further details on our financial performance.

J. Paul Whitehead, III

Let me begin by addressing the obvious disparity between our first quarter GAAP earning for continuing operations of $5.5 million, or $0.12 per share, versus our first quarter managed loss from continuing operations of $101.7 million, or $2.17 per share. Our first quarter-managed earnings were depressed principally due to the marketing volume-base fluctuations and peak charge-off interest effects of our lower-tier credit card receivable that David previously discussed.

Specifically, as we had expected, we experienced significant levels of lower-tier credit card receivables charge-offs in the first quarter. As the lower-tier accounts included within our $1.5 million of credit card account additions in the second and third quarters of 2007 followed their expected vintage curve performance and reached peak charge-off levels 8-9 months after origination, these charge-offs worked to depress our managed earnings levels.

Moreover, the lower-tier accounts that charged off late in the first quarter and those that did not charge-off in the first quarter but will instead charge-off in the second quarter this year were at peak late-stage delinquency levels in the first quarter. And as many of you will recall, we don’t bill any finance charges or fees on 90+ day late-stage delinquent accounts.

Lastly, David mentioned that our early-stage delinquencies and roll rates improved from last year at this time and relative to our expectations, which meant that our fee revenue was lower on these better performing accounts.

In summary, we experienced dramatically higher lower-tier credit card peak vintage charge-off levels in the first quarter with a disproportionately low revenue base to offset the effects of these charge-offs in the determination of our net interest margin, our other income ratio, our adjusted charge-off rate, and ultimately our managed earnings.

To contrast our GAAP results, these above factors had the same effect as the managed earnings effects on our income from retained interest in credit card receivables securitized. However, in determining the fair book value of our retained interest in our securitized credit card receivables at December 31, 2007, we had taken these factors into account in determining our evaluation assumptions of that date.

In valuing our retained interest at March 31, 2008, the going forward view as to the income and cash flow that would be generated from the March 31, 2008, receivables necessarily excludes all of the charge-offs and the depressed fee levels that we experienced based on the vintage effects of the lower-tier credit card receivables in the first quarter of this year.

As such, a rise in the fair value of our March 31, 2008, retained interest relative to the December 31, 2007, fair value served to offset the peak vintage-related actual charge-off and fee to pressure results that we experience with respect to our lower-tier credit card receivables in determining our first quarter managed earnings.

We also expect the same managed versus GAAP earning interplay in the second quarter of this year. The March 31, 2008, fair value of our retained interest in credit card interest securitized is based on valuation assumptions that fully account for the peak vintage charge-off effects of our lower-tier credit card receivables in the second quarter. Whereas our June 30, 2008, fair value calculations will necessarily exclude these effect, given that the actual adverse peak vintage effects will have been fully realized and recognized prior to the June 30, 2008, valuation date.

As such, we anticipate that a relative in the fair value of our retained interest in securitized credit card receivables as of June 30, 2008, will offset the peak-vintage related actual charge-off and fee to pressure results that we expect to experience with respect to our lower-tier credit card receivables in determining our second quarter-managed earnings.

As we turn now to a more specific review of our first quarter managed receivables statistics, note that our earnings release presents these statistics for all periods on the basis of our continuing operations only. For your further reference, however, our earnings release reconciliation of GAAP and managed earnings also contains GAAP and managed details of our discontinued operations for current and prior periods.

Our net interest margin was 13.6% in the first quarter of 2008, as compared to 17.8% during the fourth quarter of 2007, and 18% for the first quarter of last year. All of the factors that we previously discussed served to depress our first quarter 2008 net interest margin.

These same factors also caused our other income ratio to fall to 4.8% for the first quarter, from 14.9% in the fourth quarter of 2007, and 15.3% from the first quarter of 2007. Similarly, these ratios caused our adjusted charge up rate to increase to 18.5% for the first quarter of 2008, as compared to 13.2% in the fourth quarter of 2007, and 12.2% for the first quarter of 2007.

The notable improvement when you look at our managed receivables statistics is our 60+ day delinquencies, which fell 190 basis points from their peak of 18.4% as of December 31, 2007. As we noted in our last earnings call, December 31 delinquencies were at their peak because of the significant number of credit card accounts added in mid-2007 that had reached, or were reaching, a peak vintage charge-off levels.

With the charge-off of these accounts in the first and second quarters of this year, delinquencies were lower at the end of the first quarter and are project to fall significantly from first quarter levels by the end of the second quarter of this year.

Notwithstanding the short-term managed earnings depression caused by the factors we have discussed throughout this call, we see continued potential for attractive IRRs within both our near-prime and our lower-tier credit card offerings. We track these IRRs on a vintage basis and stress the calculations to reflect changes in our funding costs, changes in the general economic environment, and changes in the purchasing and payment behaviors of our customers.

Based on all these factors, we currently are comfortable with the quality of our assets and with our potential for continued growth in these assets at whatever pace that our liquidity situation will allow. As such, we expect much improved management results in the second half of the year once the large vintages of lower-tier credit card accounts added in the second and third quarters of last year pass through their peak charge-off period as expected by the end of the second quarter.

We expect to experience significantly higher net interest margins and other income ratios and significantly lower delinquency and charge-off levels in the last two quarters of this year. Evidencing some of our optimism here is data you can refer to within our credit card segment table in the 10-Q that we filed today.

Looking at the credit card delinquencies studied in that table, you can see that the percentage of credit card accounts that are 31-90 days delinquent for $3.4 billion of managed credit card receivables has declined year-over-year from 7.7% at March 31, 2007, to 7.1% as of March 31, 2008. Needless to say, we find this encouraging in the current environment.

Looking at a couple of other operating statistics for our business, we note that our operating ratio has fallen from 19.3% in the fourth quarter of last year, and 16.6% in the first quarter of last year, to 13.1% in this year’s first quarter. While a couple of factors caused a spike in our operating ratio in the fourth quarter of last year, notably good will impairment charges within our retail micro loan segment and a significant fourth quarter turn over contribution, we do note a 350 basis point reduction in the operating ratio relative to the more normalized first quarter of last year.

This largely reflects our focus on efficiency and cost cutting as a means to preserve capital. Also consistent with our capital preservation goals we spent approximately $20 million less on marketing in this year’s first quarter than in last year’s first quarter.

A couple of key capital-related benchmarks are equity to managed receivables ratio, which was at 20.9% as of March 31, 2008, is up 170 basis points over its level at December 31, 2007.

Additionally, our book value per share stands at $16.60 per share at March 31, 2008, which is slightly down from December 31, 2007, due principally to employee compensation-related share grants in the first quarter.

As we’ve noted throughout this call, our principal goal in this environment is to protect the $16.60 book value per share that we’ve created. Preserving our book value per share, particularly when our stock is trading at a significant discount to book value, is the most effective strategy that we can employ in the current liquidity environment to ensure that we can build upon the space and create additional value once the capital markets normalize, as they ultimately will.

Preserving our book value in this environment necessarily dictates a keen focus on liquidity. In this regard we had approximately $184 million of unrestricted cash on our balance sheet at the end of the first quarter. If you combine that with the available to-draw amounts based on collateral underlying our securitization and financing facilities, we had over $270 million of available liquidity at our disposal at the end of the first quarter.

We also believe we can see an increase in payments to us based on the federal government’s stimulus package under which the IRS is sending refund checks out to a sizeable percentage of our customers. If this is similar to a typical tax refund season, which we expect it would be, we would be looking at higher payment rates than we typically experience in the second quarter of a typical year.

With our over $270 million of liquidity at our disposal and our originated portfolios that are moving into cash generation mode and our current marketing levels, we feel reasonably well positioned in this liquidity environment because our receivables are performing well and because the size and nature of our receivables matches well with our current borrowing capacity.

Nevertheless, we are pursuing a number of new financing facilities and liquidity sources that, if ultimately available to us at attractive terms and pricing, will support heightened levels of marketing and growth opportunities, as well as portfolio acquisitions, all of which we believe are attractive in the current environment.

We also remain intensely focused in the current environment on reallocating our capital to those parts of our business that have demonstrated the best proven IRRs with the lowest financial and operating risks. Moreover, we continue to look for ways to drive greater efficiency and cost reductions within all of our businesses.

And while there remains far too much uncertainty in the economy and within the capital markets for us to give specific earnings guidance we continue to believe we are well positioned to earn attractive IRRs from the capital where deployed.

Let me conclude now by thanking you all for your interest in CompuCredit and your participation in this call and we would be happy to open things up now for some questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Sameer Gokhale - Keefe, Bruyette & Woods.

Sameer Gokhale – Keefe, Bruyette & Woods

Has the company had any triggers in securitizations? I haven’t been through the entire period but it seems like you have not. Can you just clarify for us if you have had any triggers in the securitizations?

J. Paul Whitehead, III

No, absolutely not, Sameer.

Sameer Gokhale – Keefe, Bruyette & Woods

And I think in terms of funding and given what’s happened in the funding markets, I think Dave had talked about how the liquidity markets have turned and we’ve all seen that, but specifically when you’re talking to some of your bank partners, are you seeing any of them balk at providing you funding facilities?

Are they saying that, giving you high charge-off rates is anything making them nervous? Because we’re seeing in the market some sub-prime auto finance securitizations getting done, things seem to be thawing a little bit. Just love to get your thoughts on exactly why you still feel very cautious on the funding markets.

David G. Hanna

Actually, Sameer, I think our banks that have facilities with us are still pretty pleased with the performance and the assets that we have with them. I think the issue there is that we have not sensed their enthusiasm for increasing the size of some of those facilities. And at renewal we wouldn’t be surprised to see some of those facilities change some, but we still have good back and forth with our banks that we have. We don’t have anything in the credit card space. We’ve got some coming up, a small deal coming up in September of this year, and then the next one doesn’t come up until March of next year.

It’s just been interesting to us and from the approach we’re taking is that we were shocked at just how much the market shut off over the last several months. And we agree with you that there have been some things out in the market that look like things might be turning back on and once we’re convinced that they are going to be turned back on, we would, of course, look to start growing again.

But we learned from watching others who did not have funds when they needed funds and it caused incredible stress on a lot of businesses and we will err on the side of caution to avoid being in that position.

Sameer Gokhale – Keefe, Bruyette & Woods

J. Paul, I know you gave us so much liquidity, the company’s access to at the end of the quarter; including cash on balance sheet and draws, but can you compare that to, I think there’s a securitization facility maturing in September. What if that facility is non-renewable, are you able to find a new facility to replace that one as well as that that’s maturing over the next year, through the end of this year, how do you expect the cash balances to work out from current levels. Could you just walk us through the liquidity position? That would be helpful.

J. Paul Whitehead, III

Yes. Specifically toward your comment about the September facility. That’s the one David referred to that is a one-year conduit that comes up for renewal in September. And there really is no immediate for the capacity that that facility provides, although if you look out on a longer-term basis into late 2009, we would like to have that capacity and it’s a very important relationship to us that we would like to continue.

This is a facility with B of A and they’ve been with us since just about the beginning of the company, but there are no immediate implications at all in that we currently have excess capacity in our near-prime master trust.

If you look out at our cash position for the remainder of this year, as David mentioned and I mentioned, we are in a good position of having purchased portfolios which are by definition liquidating and paying down their facilities and generating cash and we are also in a position where at our current marketing levels we can readily, easily generate cash and build cash balances within our originated portfolios as well.

Sameer Gokhale – Keefe, Bruyette & Woods

So when some of these facilities that are maturing, the one in September 2008, you have drawn against that facility, right? How much is outstanding on that facility?

J. Paul Whitehead, III

We have drawn against that particular facility. Effectively we could simply shift those draws to another facility that has a lot of capacity. If you will recall, we’ve got the Merrill Lynch facility that has $750 million of capacity and a higher advance rate than some of our other facilities and that is essentially where some of that [inaudible] between our actual cash balance of the $184 million and the draw potential of the $270 million comes into play, is drawing on higher advance rate facilities, substituting those for example, the monies that are currently drawn on the B of A facilities.


Your next question comes from Carl Drake - SunTrust.

Carl G. Drake – SunTrust Robinson Humphrey

J. Paul, if you could provide a little bit more specific guidance on the ratios, particularly the other income ratios seem to be a lot lower than I was modeling and did the fee up rate achieve your expectations for this quarter? And maybe if you could give us some idea of where that ratio might settle out, some type of sustainable level of fee income for the fee charge-offs. And any other guidance you can give us on other ratios once things normalize would be great.

David G. Hanna

The charge-off rates for the quarter came in pretty close to right in line where they thought they were going to come in. One of the things that affected our fees a little bit in the other income area for the first quarter was that some of our early-stage delinquencies and pay downs did come in a little bit lower than what we thought. The early-stage delinquencies. And so that would reduce the fee income some.

And we also had a little bit more in the pay down, just a little bit of the de-leveraging of the portfolio than we had forecast. And I think that’s just probably has to do a little bit with the economy, what’s going on, people paying down a little bit.

J. Paul Whitehead, III

Carl, not just on the other income ratios but on all of our ratios, if you look out to the latter half of this year, as a general matter I would tell you that they’re going to return to the more normal levels that you would expect to see and have seen from us in the recent past prior to this vintage effect in the first and second quarters. So somewhere around that general range for all the statistics.

Carl G. Drake – SunTrust Robinson Humphrey

So somewhere near the ranges of 2007? For the year, something like that?

J. Paul Whitehead, III

Yes. The other income ratio in 2007 was 14.9% and we’re forecasting a little north of that in the latter half of the year, but around that ballpark.

Carl G. Drake – SunTrust Robinson Humphrey

And so the rest of the ratios might recover back to kind or normal ranges in 2007. And by the third quarter of this year?

J. Paul Whitehead, III

As a general matter, yes.

Carl G. Drake – SunTrust Robinson Humphrey

And then in terms of asset growth, I think you mentioned last call that you expected to end the year where you began, perhaps at $4.1 billion. But given some of your comments today and given the $300 million reduction I might expect, or should I expect, that you’re not going to perhaps get back to $4.1 billion, given your goal on focusing on liquidity and book value.

David G. Hanna

No. Unless something fairly dramatic on the up side changes, we now think we’ll have a declining portfolio for the remainder of the year. Not at the same rate as the first quarter because of the charge-offs that rolled through as well as the tax payments, but we would expect the portfolio to be smaller at year-end than it is today.

J. Paul Whitehead, III

And along those lines you would see, for the same reasoning a larger drop at the end of the second quarter than we would expect to see in the latte half of the year.

Carl G. Drake – SunTrust Robinson Humphrey

Did I hear you mention the loss, or you sold the Texas stores in the second quarter, and if so should we look for some type of a loss, in the second quarter being reported?

David G. Hanna

No, in fact we had discontinued those operations because we knew we were negotiating a sale, towards the end of the first quarter. And the assets are valued at fair value at the end of the quarter and the results from those operations have been reflected within the discontinued operations in the first quarter, so the sale is simply the culmination of that transaction off the fair value, assets held for sale section of our balance sheet. And that will be it, so no real implications for Texas beyond the first quarter.


Your last question comes from John Hecht - JMP Securities.

John Hecht – JMP Securities

With respect to the large drop in the other income ratio, and in consideration of the peak charge-offs you’re going through in the sub-prime card accounts, are we in effect seeing maybe a mixed shift toward the higher end of your customer base and with that should we see normalized ratios along the lines of those before you started going more aggressively into the sub-prime accounts?

David G. Hanna

I think what you’re seeing is primarily the vintage bases. I think that you could look at maybe the mix in the first quarter of 2007 and look at that type of mix this year with the liquidity that we know we have. So that we are growing, or not growing but we are adding some of our upper-tier accounts, but we’re still adding, the accounts that we add are still the majority in the lower-tier of our business. So we don’t see the mix shifting much.

There is, of course, with the very large number of lower-tier accounts that roll through the system in a hurry, that would obviously make the mix shift slightly for the remainder of this year. But we’re not really looking to go back to a portfolio more weighted towards the upper tier.

John Hecht – JMP Securities

But just given a seasoning vintage effect, you would be running off the sub-prime accounts faster than you will be adding them.

David G. Hanna


John Hecht – JMP Securities

With respect to Q1 credit, can you disaggregate the vintage analysis and point to what we should have expected as a normal seasonal recovery? In other words, when you take out vintage effect of your sub-prime accounts, did you see normal season recovery this year or was it a little different than you would have expected, given what we’ve seen in the economy?

David G. Hanna

I’m going to let Rich handle the mechanics of that question but I will tell you that across all the portfolios we’ve really seen the performance come in as we would have expected.

Richard R. House, Jr.

Not a whole lot to add there. The best way to disaggregate it would be to look at all of U.S. credit cards, other than the deep sub-prime, and if you aggregate those and looked at them, you basically saw a slight improvement in performance year-over-year, so notwithstanding what we all read in the newspapers, our general consumer was behaving very similarly to how he did last year.

The sub-prime piece that we talked on quite a bit, obviously the vintage effect was there but the vintages were in line with the model that we had done. So as David said in his script, we’re well aware that if the economy deteriorates and the unemployment rate increases that we might see some problems with our performance. But we have not seen that to date. So that’s the best I can disaggregate it for you.

With respect to the UK, we’ve actually seen quite a bit of improvement from the time we purchased our portfolio until today, although I would not necessarily equate that to some type of economic improvement in the UK. I think that we probably bought more of a collection [inaudible] of that portfolio.

John Hecht – JMP Securities

And last question. Given that where you bought the bulk of your portfolio or your new customers last year but what we construe as a 6-9 month peak charge-off level, we should expect, even though you’re going to continue to have high charge-offs in Q2, they should drop off considerably by my math from Q1, is that correct?

David G. Hanna

We’re forecasting a drop but not what I would characterize as extraordinarily sizeable. We put on quite a bit of accounts in Q3 of last year.

J. Paul Whitehead, III

Each quarter was relatively similar in size, averaging about $750,000 or so, of new accounts, in the second and third quarters.


At this time we don’t have any further questions. This completes the presentation for today. We thank you for your participation.

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