Atlanticus Holdings Corp (ATLC) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2007 CompuCredit earnings conference call. My name is Jeremy and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to your host, Mr. Jay Putnam. You may proceed, sir.

Good afternoon, and thanks for joining us for CompuCredit Corporation's first quarter 2007 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 ratio and charge off levels, acquisition of portfolios, assets or complementary businesses, growth expectations for our other finance segment and recent acquisitions, the expected level of marketing expense, our income and earnings expectations 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 forward-looking statements that we make today, you should read the forward-looking information section and the risk factors in our Form 10Q for the quarter ended March 31st, 2007.

Thanks again for your interest in CompuCredit. Please feel free to contact me if you'd ever have any questions you'd like to discuss. You may also access our website to obtain a hard copy of their press release and our financial statement, to view our risk factors or to listen to an archived version of this conference call.

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

Thanks, Jay, and thanks to you all for joining us today. I'll spend a few minutes reviewing our results from the quarter and then provide some color on our latest strategic developments. After that, I will turn it over to J. Paul Whitehead, our CFO, who will discuss our financial results in greater detail. As usual, after our prepared remarks, we'll be glad to take questions you may have.

This afternoon, we reported first quarter 2007 results and on a GAAP basis, we posted a net loss of $2.5 million or $0.05 per fully diluted share, compared to earnings of $30.7 million or $0.61 per share from last year's first quarter.

On a managed basis, we reported a net loss of $9.4 million or $0.19 per fully diluted share, compared to net income of $54.8 million or $1.09 per share from last year's first quarter.

As you know from last quarter's call, we had expected to earn a modest profit this quarter, so the reported loss was unexpected. We will outline the various items that contributed to the loss during the quarter, but importantly, we will also outline why we have confidence for strong results for the remainder of the year.

An important point to make is that we have not seen evidence that would suggest that there has been a meaningful downturn in the performance of our customers. In fact, we have seen a better performance on our delinquencies than we had forecast. We get asked about our view on the economy due to the problems in the sub-prime mortgage area. Our view is that the underserved market remains relatively robust. J. Paul will discuss in greater detail the various factors that led to our first quarter results.

We have some exciting initiatives going in many of the areas of our business. At the same time, we have faced many challenges over the last several months and we believe that we have taken steps to ensure that we are well-positioned for growth in the future.

Along those lines, you have heard us speak over the last few quarters about various changes that we have made to our products and services that we believe make those products and services even more customer-friendly than they already were. We believe that we have set a higher standard with our marketing materials and disclosures than are being employed almost anywhere else in the financial services arena. We have conducted surveys of our customer base over the last several years, almost since we began the company. We believe that our customers are the best judge of how we are treating them and what different products and services they might like to receive.

This is in line with our testing mindset of all of our products before major launch. Our surveys have consistently shown very favorable impressions by our customer base. In fact, we have had satisfaction results that compare favorably to most providers in the financial products and services universe.

That said, in conjunction with a review of our business and our plans for trying to grow to become a much larger company, we looked at ways that we might improve upon our approach. It is our belief that only through a constant effort at improvement will we really be able to become the leading provider of financial products and services to the underserved market. This review has included inputs that we have received from various regulatory agencies. We believe that the cost associated with the various changes we have made over the last several months are well north of $25 million and we may choose to make or be required to make additional changes in the future. We are confident, however, that we are well-positioned to grow and serve our customers' needs moving forward.

I'll speak briefly about our business segments, as well as give an overview of some of the exciting investments in capital that we have made over the last few months. As J. Paul will discuss, most of our shortfall for the quarter, we think the credit card business is in great shape to rebound and have a very good year's performance. Within our credit card segment, for example, we are seeing very strong account growth within a rational competitive environment and we experienced lower than expected roll rates and delinquencies in the first quarter. This quarter is off to a good start, as we saw some of the best growth in new accounts ever in the month of April. We are optimistic that the trend in new account origination will continue. Both of these factors are expected to contribute to a very strong second half of the year within our credit card segment.

We also expect to see positive contributions to our credit card segment results, based on the capital that we deployed to buy our $970 million Monument branded credit card portfolio from Barclays in the U.K. While this particular deal is not expected to provide as high of returns as we have seen from some of our other purchases, we do believe that it will be a wise use of capital. We expect this portfolio to generated $0.15 to $0.20 of earnings for 2007 and for the next several years.

More importantly, it is of significant strategic importance to us, as it establishes a beachhead for us in the U.K. from which we plan to originate credit card receivables much like we do in the U.S. It also gives us a platform to explore other credit card portfolio acquisition opportunities. We believe we can deploy our decisioning engines and data mining techniques to the U.K. business and we hope to be in a position to begin issuing cards later this year or early in 2008.

As we have mentioned on past calls, the U.K. environment is one we have studied for quite some time. Just prior to our Monument portfolio acquisition, we opened four retail Micro-Loan locations. We have been very happy with the early results of these storefronts and we have plans to continue expanding our footprint in the U.K. throughout 2007 based on our belief that financially underserved U.K. consumers desire the multi-product financial solutions we offer in the United States.

We also disclosed today in our Form 10Q that we did another acquisition in the U.K. just after the close of the first quarter and prior to our Monument credit card portfolio acquisition. We purchased 95% of the outstanding shares of MEM Capital Limited. MEM is the U.K.'s leading provider of online micro-loans and operates a wide portfolio of brands and websites offering its cash advance and term loan products. It also provides financing for mobile telephone handsets. As we continue to bolster our own internet lending strategy in the U.S., the MEM acquisition jumpstarts our efforts in the U.K. and provides us with what we feel is a tremendous opportunity to complement our other U.K. ventures.

Over the last several months, we have invested close to $120 million in the U.K. This is one of the larger investments that we have made as a company and we think it will allow us to reap the same type of growth as we have seen in the U.S. market. We feel very strongly that the investments we have made in the U.K. will allow CompuCredit to grow in scale and profitability, while broadening our potential customer base. And we continue to explore other opportunities in the U.K. and elsewhere.

In addition to the U.K. acquisitions, we did two other acquisitions during the first quarter, both of which were within our auto finance segment. In our last conference call, we mentioned our ACC acquisition and our related acquisition of a $195 million portfolio of auto loans that had previously originated and sold to the Patelco Credit Union, and for which it retained servicing responsibilities. Under our ownership, ACC began originating new loans through franchised dealers at the end of the first quarter and we should begin to see the positive effects of those originations in our auto finance segment in the second quarter and beyond.

Also, having learned about buy here/pay here auto dealers through our car platform, we decided to purchase a 75% ownership interest in an Atlanta, Georgia-based buy here/pay here dealer operating under the name of Just Right Auto Sales. At its acquisition date, Just Right Auto Sales operated four retail locations in Georgia and it has now procured three additional locations that will open over the next few months.

Just Right Auto Sales sells vehicles to consumers and provides the underlying financing associated with the vehicle sales. Customer purchases are financed for periods of time between 24 and 30 months and credit is approved and payments are received in each storefront.

We continue to believe that auto finance can be a large business for us, that contributes very meaningfully to our earnings. It has not been yet, but we think we have a plan that will allow us to so during the next few years.

Finally, to close out our discussion of our first quarter capital deployment activities, we repurchased 2.9 million of our shares in March. We paid $30 per share for this block and we were extremely happy with the opportunity to buy such a large block at once. We have oftentimes discussed our criteria for capital deployment and we were excited to purchase a large block of an asset we know very well that we believe will exceed our return hurdles.

We invest the capital of CompuCredit as if we were investing our own personal dollars and, to a large degree, we are. Our rule for investing is simple in that we try and determine where we can invest our capital to get the greatest return possible with the least amount of risk. We have been extremely effective with our capital deployment in the past and look to continue that trend. We still believe there are tremendous growth opportunities in the underserved market for financial products and services and continue to evaluate multiple opportunities.

We remain very excited about the future for CompuCredit. We find ourselves now, after ten years in business, with more upside than we have ever had in the past and believe our prospects for growth are among the most exciting in the financial services industry. We are as committed today as we have ever been to our vision of being the premier financial services provider for the underserved consumer and we are confident that the moves we are making position us for long term success.

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

Thank you, David. First, let me review some of our key financial operating and statistical data and then discuss some details of our financial performance.

To recap our results for the first quarter, we had a GAAP net loss of $2.5 million, or $0.05 per share on a fully diluted basis. We also reported a managed loss of $9.5 million, or $0.19 per share on a fully diluted basis for the first quarter.

For a reconciliation of GAAP net income to managed earnings, I refer you to the reconciliation table in today's earnings release.

Looking at our key managed statistics, our net interest margin was 17.9% for the first quarter of 2007, compared to 22.6% in the fourth quarter of 2006 and 25% from last year's first quarter. Our other income ratio was 15.8% in the first quarter, down from 16.5% in the fourth quarter of 2006 and 19.2% from last year's first quarter.

Our adjusted charge off rate was 12.5% in the first quarter, up from 11% in the fourth quarter of 2006 and 7.1% from last year's first quarter. And while up from 10.6% as of March 31st 2006, our 60-plus day delinquencies declined from 14.1% as of December 31st, 2006, to 12.8% as of March 31st, 2007.

With our credit card segment being as a large a component of our business as it is, its performance obviously drives many of the above statistics and these statistics are in line with the $8.1 million pretax loss that we experienced with the credit card segment in the first quarter.

While, with the exception of delinquencies, our first quarter performance was disappointing, certain of the contributors to our first quarter loss and to the negative trends in our managed statistics are expected to contribute to strong performance in the latter half of this year, as David already noted. Dissecting the reasons for our credit card segment losses, we can differentiate between factors that we expected and those that web did not anticipate.

One expected negative factor contributing to our loss in our depressed net interest margin and other income ratio was the final stage of the implementation of our billing practice change to cease billing finance charges and fees on credit card accounts that become over 90 days past due. As expected and previously communicated, we experienced first quarter charge offs related to delinquent receivables that were on the books prior to the change, resulting in a temporary mismatch as interest and fees that were billed on these late stage delinquent accounts were charged off in the first quarter without being replaced by new billings of interest and fess on accounts becoming over 90 days past due after the change. We estimate that this transitional mismatch had a $24 million adverse affect on our first quarter pre-tax income, but it is completely behind us now with the close of the first quarter.

The maturation of very large vintages of our lower tier credit card receivables to peak charge off vintage in the first quarter is another expected and very significant factor contributing to our first quarter loss, as well as our depressed net interest margin and other income ratio and our heightened adjusted charge off ratio.

Marketing volume based volatility for the receivables associated with a largely fee-based credit card offering to consumers at the lower end of the FICA scoring range caused a peak in delinquencies at the end of the third and fourth quarters of 2006 and higher charge off levels in the fourth quarter of 2006 and the first quarter of 2007.

This class of receivables reached its peak charge off on a vintage basis between approximately 8 to 9 months after card activation and we experienced marketing-based volatility in our volumes associated with this product offering as we ramped up its growth rates significantly late in 2005 and in the first half of 2006.

As such, we experienced a heightened level of charge offs and delinquencies for this class of receivables in both the fourth quarter of 2006 and the first quarter of 2007, as significant vintages of receivables reached their charge off peak during these quarters.

As growth rates for the receivables associated with our largely fee-based credit card offerings to consumers at the lower end of the FICA scoring range normalized, as we expect they will, and as our asset base for this pool of receivables grows, we are less likely to experience the same degree of marketing volume based volatility and peak charge off vintages that we experienced over the past couple of quarters.

The timing and extent of our marketing efforts was also expected to adversely affect our first quarter results. We spent a record amount on marketing in the first quarter and expect to reap the benefits of this spend in future quarters. In the first quarter, we grossed 388,000 new credit card accounts and plan on much stronger growth for the remainder of this year. In fact, our April credit growth account originations were by far the highest one-month total in our history and we are well on our way to generating more new growth account additions in 2007 than in any year in our past.

We think the testing we do, the data we mine and the discipline we maintain will enable us to generate many profitable customer relationships this year and beyond.

Now, to the unanticipated factors that affected our first quarter earnings. Quite contrary to the peak delinquencies we experienced in the third and fourth quarters, our first quarter delinquency trends improved relative to our forecast and experience throughout 2006 to the point where late and over limit fee billings were approximately $22 million lower than we expected in the first quarter. While our better than expected delinquencies clearly depressed our first quarter earnings and our net interest margin and other income ratio, these lower delinquencies bode very well for charge off levels in the latter half of this year and reinforce our confidence in the credit quality of our receivables.

Lastly, our net interest margin and other income ratios have been affected by other actions we have taken beyond the fee billing discontinuance on 90-day past due accounts that I talked about previously. Consistent with our belief that we have always had some of the most consumer-friendly practices in the credit card industry, we have proactively implemented several credit card program changes over the past several months. And, while some of these changes will have ongoing effects on our business, some of them are discreet items which should not have ongoing effect.

For example, in the first quarter of 2007 and with deference to our issuing bank partners, we issued just under $6 million in late fee and over limit fee billing credits to customers' accounts related to the potential for customers' confusion over a change that we made to their minimum payment requirements. While these credits were not anticipated coming into the quarter, we are convinced these consumer-friendly moves will be good for our company and our customers long term.

Now that we have experienced the transitional effects, the final transitional effects of the billing program change whereby we're no longer billing finance charges and fees on over 90-day past due accounts, all other factors being equal, we expect to see a permanently lower gross yield ratio and combined charge off ratio. We also expect our net interest margins and other income ratios to show improvement in each successive 2007 quarter, now that such a large vintage of peak charge off receivables associated with a lower tier credit card product has charged off in the first quarter.

Specifically, we expect our net interest margin to rise to over 19% in the second quarter, over 21% in the third quarter and over 22% in the fourth quarter. We also expect our other income ratio to rise as well to over 16% in the second quarter, to over 22% in the third quarter and to over 25% in the fourth quarter.

Lastly, with regard to our expectations of some of our other managed receivable statistics. Our acquisition of the Monument branded U.K. credit card receivables portfolio at a discount to face is expected to have a meaningful impact on our managed receivables data. Considering the effects to this acquisition, coupled with the mixed change dynamics that we have discussed in prior quarters for our lower tier credit card product, we expect to see a spike in our second quarter combined charge off ratio. We also expect a spike in our second quarter 2007 net charge off ratio to over 17%, followed by a gradually declining net charge off ratio in the subsequent quarters of 2007.

And finally, while we expect a significant reduction in our- - we expect a significant reduction in our adjusted charge off ratio in the second quarter of 2007 to under 9%, followed by a gradually increasing adjusted charge off ratio in succeeding quarters of 2007 to approximately 11% in the fourth quarter, as the gap between our net charge off ratio and adjusted charge off ratio narrows with our funding of cardholder purchases within the U.K. dollar-for-dollar.

Turning now to the expense items, which are similar for both GAAP and managed earnings. Our first quarter marketing expense increased $5 million over the prior quarter and we expect a large increase in second quarter marketing based on the success we are having.

Our operating ratios should decline in the coming quarters, as the U.K. credit card receivables portfolio is comprised of accounts with larger account balances than the receivables associated with our lower tier credit card product.

We are also keenly focused on expense control with the goal of ensuring that we maintain the type of cost efficiency and competitive edge we had as a smaller company.

With respect to our liquidity position, we currently have approximately $425 million of available liquidly. We expect this level of liquidity to support our operating and originated growth plans for the remainder of 2007. We will continue to look at opportunities to invest some of this capital and will continue to be stringent in our criteria for capital deployment.

Taking into account many of the factors we have already discussed, we remain comfortable with our previously communicated expectation of earning over $4 per share on a managed basis for 2007. We have received some questions about quarterly profitability for the remainder of the year and this year is fairly unusual in profitability for the various reasons we had outlined. Our expectation, however, is that we will have earnings of $0.50 to $0.60 during the second quarter, approximately $1.50 per share during the third quarter and approximately $2.15 per share in the fourth quarter.

Let me conclude now by thanking you all on behalf of both David and me for your interest in CompuCredit and your participation in our first quarter earnings call. With that, we'd be happy to address any questions you have.

[Operator instructions] And, sir, your first question comes from the line of Dan Fannon with Jefferies. You may proceed.

Good afternoon. David, you mentioned in your prepared comments about $25 million in costs that you incurred, I think with regard to some of the billing practice changes and things. I'm not sure, was that incurred in the first quarter or those incurred over the last several quarters?

Primarily that, that was referring to the last couple of quarters.

Can you break down what it was here in the first quarter?

I think J. Paul walked through one example.

Yes, one of the examples that was, I think, $22 million, yes.

Okay. And then, can you give us some specifics on the Barclays' portfolio in terms of- -

I'm sorry, $24 million.

$24 million? Okay. Can you give us some specifics on the Barclays' portfolio in terms of account size, credit profile, kind of yields and charge off levels that you're seeing in that portfolio?

Well, we did buy it at a discount to face value, so that would indicate that it's got a slightly, it's more like a sub prime portfolio and some of the accounts we bought are troubled accounts, if you will, or distressed accounts, that we think that our particular brand of being able to buy a portfolio and improve a lot of the metrics and make sure that people are in the products that are appropriate for their credit level, we think we've got more ability to work in that environment because of our long history of buying that same type of portfolio than did Barclay Card or others that are in the prime business. So, it is not, the nature of the customer is not dissimilar from the nature of some of the customers that we have on the books today. What is dissimilar is some of those customers in the, in that market probably weren't priced at the right level for the type of customer that were in the past. And as we move forward, we look to be able to improve on some of those metrics.

Okay. And is it, the average account size is larger than your typical account?

Average account size would be a little, would be a little bit larger than our traditional core credit card business.

Okay. And then, lastly, any update on the regulatory investigations that you guys currently have ongoing? It seems you guys are making some changes with billing practices, being more proactive. How much of this has been pushed down upon you by the regulators and how much of this is you guys taking some initiative?

You know, I think we've had a lot of constructive dialogue with the various regulatory agencies. Our approach has always been to try and work with regulatory people and to address any concerns they have. And so, we have, think we've been fairly proactive in making some changes that are probably viewed, a lot of those changes are probably viewed favorably by the regulators.

Okay, thank you.

And your next question is from the line of Moshe Orenbuch with Credit Suisse. You may proceed.

Thanks. I was wondering if you could talk a little bit about your expectations for the step up in net interest margin and the other income ratio from the second to the third quarter. Is that a re-pricing? What's the cause of it at that point in the second half? I've got another question after.

It's really an effect, Moshe, in the marketing effort in the new account originations that they, that we'll be booking and the obvious impact that you get those assets being fairly high yielding assets have on our ratios.

J. Paul, could you just go over again what you said about the charge off and adjusted charge off ratios? I kind of missed that.

The physics, Moshe?

Yes.

Okay. Just one second here. What's going to happen, our net charge off ratio is going to rise to 17% in the second quarter. We expect that to happen with, based on the portfolio acquisition. Our adjusted charge off ratio, however, given that several of the charge offs will occur in the second quarter are going to be related to the acquired portfolio for which we did not pay the full face amount. We expect the adjusted charge off ratio to be under 9% in the second quarter and then to gradually increase in the successive quarters of '07 and end up at approximately 11% in the fourth quarter.

Okay. Just one other question. And that is, you mentioned a lot of efforts to kind of change and improve and kind of make your billing practices more consumer-friendly. If we kind of make the adjustments, I guess, the $24 million that you were talking about and $6 million of one-time costs, which I assume were two separate things, right?

Yes.

If we make those adjustments, is it fair to say that you should be able to pretty much substantially keep the rest of the practices the same at this point? Or kind of following up on the other question, what else is out there and how do we think about that?

Our expectation is that we have made changes that are, that address some concerns that have been raised, that address the lion's share of concerns that have been raised. And we don't expect making additional changes to the billing practice and the like. You know, anything can happen, but our expectation would be that the product offering and the practices and everything that we have today are truly a higher standard than almost any of the other competitors that we see out there and the like. So, we feel pretty good about where our business is today going forward.

Okay. Thank you.

And your next question comes from the line of Sameer Gokhale with Keefe, Bruyette and Woods. You may proceed.

Hi, just had another question on the U.K. acquisition. David, you talked about that a little bit. And what I was trying to get a sense for, it does seem like a pretty large acquisition. Granted you bought at a discount and you've been pretty successful with those acquisitions in the U.S. But doesn't it seem like maybe kind of a big bet in the U.K., given that you haven't been issuing cards there? How do you get comfortable with how those accounts are going to perform relative to your expectations, given that the discount doesn't seem to have been very large. So, there's not as much room, maybe, for error there.

Well, as I mentioned, we have traditionally be able to buy portfolios at better purchase prices than this portfolio. The competition in purchasing portfolios, whether they be in the U.S. or the U.K., has increased dramatically over the last few years. And we believe that the portfolio we bought, that for the capital, the equity capital that we invested, is a pretty fair return on it. The exciting thing for us, though, is not so much just that return on that portfolio, but the opportunity to try and grow our underserved business in the U.K.

So, you asked a good question, which is how do you know you're going to be able to grow a credit card business in the U.K.? And the answer is, we don't know for sure and we're not counting on that as part of this transaction or counting on it in the purchase price or the anticipated results. What we have looked at though over the last few years is we would like to make an investment in the U.K. to begin issuing credit cards.

This gave us the opportunity to kind of do both, to get a portfolio at a fair price- - not a fabulous price, but a pretty good price- - that we think we can get a good return on. But, also to sort of get the ability to issue cards, get data on almost a billion dollars worth of receivables that we can use in our modeling and data mining, credit scoring and the like. Go back and use that data to come up with models that we can use in the U.K. to try and originate with the same type of success that we've had here.

Time will tell how successful we are at it, but we have a fair degree of confidence. We've got several of our people that are going to be moving to the U.K., at least temporarily, and spending a lot of time over there.

Okay, that color has actually been very helpful. So, thank you for that. And the other question I had was, in the U.K., as you kind of ramp up your issuing business there, which banks, or have you signed up any bank to partner with similar to your relationship with CB&T and other banks here in the U.S. for issuing cards?

We've got a partner bank for the purchase of this portfolio. We have not yet signed up a partner bank for issuing new cards. And we have been, though, spending like I said a lot of time and effort over there and we expect to have that in place over the next few months.

Okay. That's helpful. Thank you.

And, sir, your next question comes from the line of Carl Drake with Sun-Trust. You may proceed.

Yes, thanks. Good afternoon. J. Paul, in terms of the unusual expenses in the first quarter, I heard the $6 million that was a billing credit and I think I heard $22 million of unexpectedly lower over limit fees. Are those the primary, maybe you could run through just the unusual items that were in the first quarter.

Yes, the other items, I think you've got it right, Carl. The $22 million was the aggregate effect of lower delinquencies that we experienced in the first quarter than we had planned and estimated. And that translated into lower late fees, lower over limit fees. Also had an impact on the level of our accrued interest and fees that we run through our accounting system. You've got, obviously, the billed interest and fees that come off the [TEESA] system that supports the managed data. But we also do an accrual based on the gap between the end of a cardholder cycle date and the end of the reporting period and do an accrual. So, all of those metrics were affected by a significantly lower delinquencies that we had anticipated.

I will say also that the lower tier product that we have is a fairly high yielding asset, such that fairly nominal movements in delinquencies and cardholder purchase and such have a more pronounced effect on earnings than we would have experienced within our core traditional credit card product for which your yield was not as significant as it is for the lower tier products.

Okay. And what do you think caused the lower than expected delinquencies in the quarter? Was it some of the, I mean, how do you explain that, given the macro environment?

We actually think that we're doing a little better job on underwriting on the front end. Some of it is the newer customer. And as it pertains to the macro, as we've said a couple of times, we are not seeing the mortgage market or other things in the consumer credit area having a detrimental impact on our customer base. Now, if there's a ripple effect that goes through with the mortgages later this year, we may see something. But, the data we see to date does not suggest that there's anything but a pretty healthy customer base that we have.

Okay. In terms of the same question, in terms of the guidance, particularly the $1.50 and the $2.15 in the second half of this year, I guess the question is, is that a sustainable level of profitability? Or is that perhaps some higher level of profitability with some, as the new vintages have peak losses, maybe they season, would you perhaps see some kind of a lower level profitability following in '08? I'm just trying to get an understanding of that level of profitability, particularly the $2.15 in the fourth quarter.

I think that the $2.15 does have some- - artificial is not the right word, but some momentum from some of the things that we discussed that occurred in the first quarter and some of that new account growth. So, I would not look and say that's a number that is probably long term sustainable. I would think that the third quarter number or somewhere between the third quarter and fourth quarter would be something that I think that, if we continue to see the same type of account growth that we're seeing today, the same type of opportunities out there, and the customers are doing the same, I would suspect that that would be a safe bet for an ongoing type of level.

Okay. That's helpful. And then, is there any possibility of the customer-friendly changes having perhaps some impact on future profitability that you haven't thought about our estimated?

We certainly don't think so. We think we've gone through a pretty in depth analysis of where things are and what our expectations are for the future. So, we think those are all pretty baked in.

And you haven't lowered fees or anything, annual fees or particular types of fees for the lower tier as part of the customer-friendly changes?

I don't believe we have.

So, the economics of- -

I mean, there's always new products. Let me, every one of our products is kind of an ongoing test phase. So, I don't want to imply that we haven't tried new products and new things out there. But, the mix that we have today and the current accounts that we're booking are reflective of the expectations that we've put out there today.

Okay, then last question on the operating ratio, I think you mentioned that's going to trend directionally higher. Is that correct, J. Paul?

No, down.

Oh, that's right, because of the U.K. acquisition- -

Right.

- - and the efficiency. Could you give a little color on that ratio?

In terms of expectations, we see it declining down to kind of a sub-16, little over 15 by the fourth quarter of this year.

Okay. Thank you.

And your next question is from the line of Joel Houck with Wachovia. You may proceed.

Yes, thanks. I think you guys mentioned 388,000 new accounts. I guess that was in the credit card business. The number of accounts only increased 80,000, so was there more attrition than anticipated or what was kind of driving the low net growth in accounts in the quarter. And I have a follow up question.

First of all, I think that typically we see more drop off in the first quarter than most other quarters, just from an end-of-year type issue with a lot of the lower end customers in particular. But, I don't think there was anything in particular about- -

Well, the peak charge off that had just coming through. A lot of accounts would have charged off, so it could be with that.

So, it was a combination of charge offs and just your normal attrition at the beginning of the year?

Yes.

Okay. And in the marketing spend of $35 million, can you give us a sense for the timing of how that was spent? Was it ratable during the quarter? Was it front end, back end loaded? I mean, how did that, just how did you spend the dollars in terms of time frame during the quarter?

Probably more back end rated than pro rated.

Okay, and do you have a sense for- - I think the last call you kind of gave annual guidance for marketing- - do you have a sense for what, in a range for what you guys anticipating spending for marketing this year?

I think we gave around 160.

Has that changed?

And it's going to be right about that, right in that ballpark. Maybe a tad bit more is what we're seeing in the forecast we gave today.

Okay, thanks. And then the last thing is, the other income ratio going from 16 to 25. I mean, that, can you give more explanation in terms- - it's a pretty big delta over a couple of quarters. And that doesn't seem like it's been under as much pressure as the net interest margin. So, I guess I'm not clear on why that would rise so sharply, given that it hasn't been, it's been somewhat depressed, but not like the margin.

Well, you have to look at, Joel, I guess where we are this quarter. When you say, talk about rising from this quarter to where it's going to be at the end of the year. First off, you have just mixed change, ongoing mixed change, as a greater proportion of our receivables will be derived from the lower tier product offering. You've got growth in the lower tier product offering at an accelerated rate throughout the balance of this year that we're planning on. We certainly saw that in April. We certainly expect to see that at the balance of the year.

You also have the unique factors that cause the other income ratio to be depressed in the first quarter, those being that you had charge offs of fees that were billed, the over limit fees, running through that other income ratio and you had- - this was on the 90-day billing change- - and no offsetting income to match against that, because we weren't billing over limit on the 90-day plus accounts during the first quarter.

And then lastly, you had the peak charge off vintages coming in during the first quarter depressing the ratio. So, the first quarter ratio is depressed a fair amount. And then you do see some benefit from the marketing effort in the mixed change throughout the balance of the year as we ramp up and grow the lower tier product.

Okay. Thanks, guys.

Your next question comes from the line of Dennis Telzrow with Stephens. You may proceed.

Good afternoon. With regard to the U.K., is there any opportunity- - I know you've obviously tried to get some banking ownership in the U.S.- - is there any of that available in the U.K. or offshore in other countries which could be used to originate cards?

We're looking at a, obviously they have slightly different banking laws and regulations and the like than we have here. And we are looking, Dennis, at a variety of potential solutions for that in the U.K.

And second question, you mentioned your acquisition, I think it was MEM Capital. Is that business currently profitable and is there, I'm sure there's probably in the Q, but obviously haven't had time to read it. And is there, what's your expectations on sort of where they can?

Well, if they post quarter acquisition and April acquisition, so we have not disclosed the profitability of that particular line of business. It's probably going to fall within our other segment as we move forward. It is today marginally profitable, but the reason why the margin [Inaudible]- -

We're growing.

- - is because we're rapidly growing and they've experienced rapid growth and we are likewise deploying a fair bit of capital to rapidly grow that business.

But we expect that business to be profitable this year and next year.

Yes, absolutely.

All right. Thank you very much.

Your next question comes from the line of [George Amowick] with Philadelphia Financial. You may proceed.

Hi, guys. Most of my questions have been answered. Two quick ones. The monthly progression in charge offs, can you say how that went in terms of month-over-month, because it appears that March was higher than January and that would kind of imply that last, next quarter would drop so precipitously.

I'm not sure where you're getting the data on March charge off levels, as we don't disclose monthly data. I really don't have the monthly data right here at our disposal to talk about.

Well, I mean, did your month, okay. Different topic then, is your reserve level. How do you think about the reserve as a percent of the balance sheet receivables? And how do you target that number?

The reserve as a percentage of our balance sheet receivables, we, like most companies, we do a lot of analytical review on the expected performance of the receivables that are sitting on our balance sheet at period end. We have an approach whereby we look at what historical results have been with the number of accounts that have charged off historically. We divide that up into various delinquency buckets. We look at roll rates for our various categories of receivables. And we come up with our best estimate. Of the receivables that exist today, what of those receivables that exist today will ultimately charge off in the future. So, that's what we do with respect to the on balance sheet receivables. So, effectively there's no IO strip included in the value of the receivables on the GAAP financial statement. It's simply what exists today. What do we expect not to collect, based on the analyticals that we do and based on qualitative factors like where is our underwriting today versus where it was when we looked at historical data, et cetera.

Okay. And then just one follow up, because you said the delinquent numbers were way down or down sequentially and you said that would be a good guidepost. So, would that kind of imply that the charge offs were trended lower in the quarter, too, or you just don't have the data there?

No, delinquencies would typically manifest themselves into lower charge offs down the road as the delinquencies roll through the delinquency buckets and ultimately charge off. Our general charge off policy is 180 days. So, 180 days from the first kind of bucket where you see lower roll rates and better delinquency performance is when you're going to see the effect at the lower delinquencies- - lower charge offs, lower charge offs.

Okay, thank you.

Your next question is from the line of Michael [Cohen] with [Sinova] Capital. You may proceed.

Hi, wondering if you could walk through the economics of the lower tier customer. Just kind of yield, fee income, expected charge offs, funding costs, et cetera, OpEx, down to ROA.

That's data, a lot of that we consider somewhat competitive in nature in terms of how our offers compare to customer offers out there, other competitors' offers. It is much more of a fee-driven, convenience-driven product than the traditional credit card that we've had. The APRs on that product are typically right at 20% and the annual fees and the like account for a lot more of income in that product than the APR might in our traditional product. So, it's much more of a fee, a convenience-based product. And the goal there is, as the customer has that product over time, we graduate that customer and we follow the customer's performance with us, because that tells us more about how that customer might perform than anything else. And so our goal there is to take customers from the higher fee product and over time they move in to more of a product similar to our traditional product, where the APR starts driving a lot more of the yield than the fee does.

Okay. Okay. You know, I mean generally speaking, a lot of consumer finance companies are willing to kind of offer, gee, here's the broad parameters in light of the fact that the actual targeting and the FICA band and sort of marketing expertise to acquire that customer is really kind of the special sauce. I'm just trying to understand the economics.

Yes, we have shared a fair minute- - we have shared what David said and then we've shared the basic fee structure for the product, the level of fees that we charge, the annual fees, the size of the introductory credit line, you know, typically been $300 sort of credit product in the past. There is also a good bit of information that I think you can glean on the economics of the product by working your way through our segment data that we provide in the credit card segment. So, it may take, it may be that may be more efficient to do that and then do follow call as opposed to our working through all that right now.

Okay. And where do you guys kind of see your leverage ratios long term, kind of by line of business? Or equity to managed asset ratio.

You know, by line of business is probably, I would say that we don't expect to see a great deal of disparity in that ratio by line of business and we tend to look at the overall capital structure of the business at more of a macro level. I think we talked about this in our last call to some extent, may have received some questions on this. We probably in the kind of 20% range is a decent target for us. Still probably a little bit higher capital ratio than a lot of the banks might have or might be required to hold, but sufficiently low enough to allow us to achieve our desired return on equity.

Great. Thank you for your time.

Sure.

And, sir, you have a follow up from the line of Sameer Gokhale.

Hi, just had a couple of quick ones. Is any update on your payday lending efforts or neighborhood store efforts in Texas? And I think you talked about cross-selling in some of those stores. Do you have any statistics that you could share with us on how that's progressed over time?

I don't have specific statistics to share with you. I can tell you that we're up to I think 31 stores in Texas from the 20 that we did have and we continue to see good things there. We're still very excited about the business model that we've employed there where it is much more than a one product offering. We've got a lot of products out there. And we still continue to look to ramp up pretty dramatically in Texas for the rest of the year.

Okay, on the, you were talking about graduating customers from the lower tier card to the upper tier card now. You've been offering the lower tier cards since the end of '03, so it seems like you probably had fair amounts of opportunities to move those customers up market. Do you have any statistics where we can say X percent of customers that were performing customers 12 months after getting the lower tier card were graduate to an up market card? Do you have any data like that that you could share with us?

We do not have that data right here. Perhaps we'll share it in a future all, because it is one of our strategies is to take customers from the intro offer, if you will, and move them into higher credit lines and products that offer more to that customer base. So, I think it might make sense for us to share some of that data in the future. Like I say, I don't have that right in front of me at this point.

Okay, and just my last question. I just want to get your thoughts on this or how we should think about it. You look at the business and there's what some call the high degree of regulatory scrutiny on this business. Results can be volatile depending on timing of marketing, et cetera. I don't believe you have a corporate deck rating. Why- - your securitizations are private securitizations, not public securitizations. So, how would you think about, or how should we think about maybe for the potential of this company to be taken private at some point in time? I think you've been asked that in the past, but in light of the recent private equity bids, I was just wondering if there was any change to your thoughts regarding that?

I wouldn't say there's any changes to our thoughts.

Okay. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the presentation and you may now disconnect. Have a wonderful day.