Atlanticus Holdings Corp (ATLC) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the CompuCredit first quarter 2008 earnings conference call. My name is Sylvana, and I will be your coordinator for today. At this time, all participants are in the listen only mode. We will be facilitating a question and answer session towards the end of this conference. (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, you may proceed sir.

Good afternoon, 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 verdict, net interest margin, other income ratio, delinquency and charge-off levels, (inaudible) performance and payment rates, acquisitions of portfolios or other assets, product expectations for our business segments, our expected levels of marketing expense, our earnings expectations, our liquidity levels, and capital raising plans. The impacts of proposed legislation or 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 made today, you should read the forward looking information section and the risk factors in our form 10-K, for the quarter ended March 31, 2008.

Thanks again for your interest in CompuCredit, please feel free to contact me if you ever 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to obtain a hard copy of the press release, and our financial statements, to view our risk factors, or to look into an archived version of this call.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.

Thanks Jay, and thanks to you all for joining us. 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 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, 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 positive position. As J. Paul will discuss, this has included reducing some cost, 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 deleveraging of the portfolio, much quicker of 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 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 deleveraging, 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 have-- 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 we have historically been able to do well, as our specialized servicing and account management tools enable us to exceed, more than companies that have their strategies focused on 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 track over the years, with liquidating pools, rather than open ended pools of loans. 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 will not bet the future, until we know 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 $.05 per share, compared to a net loss of $2.5 million or $.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 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 affect of the huge growth that we had last year, and the resulting charge-off of eight to nine months later, that we are now seeing. It is 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 ten-year plus history, we are pleased with how our current portfolio is tracking, and it is something 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 did not perform to the standards that we expect, and we have included that learning 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 tells us about the opportunity to originate and grow in the current environment. All premise however, on the availability to us on the liquidity necessary to grow. Our vintage level confidence in 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, for accounts 31 to 90 days delinquent. There is approximately a 50% reduction in early stage delinquencies in 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 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 would obviously 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 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 Barclaycard. As our first foray into the U.K. the barclaycard deal has performed well in its first year, and we leveraged on this acquisition, and began testing the origination of credit cards in the U.K., on a small scale at of the beginning of this year. We have over 250 employees working on our behalf in the U.K. and we now have the critical mass to grow this business. As the capital markets move forwards towards the norm, and liquidity improves over time, we have high long-term hopes for our U.K. credit card business, since it's 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, an impediments that 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 transfer business, Jefferson Capital continues to flourish with $16.1 million in pretax 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 card charge-offs, given their peak vintage charge-off levels, and its sale of those charge-offs to Encore Capital under its five-year forward flow contract with Encore. With an increased supply of charge-offs in the marketplace, generally and proven products and practices, Jefferson Capital is well positioned to be a leading player in this attractive market, for years to come.

Our retail micro loan store fronts generated $4.4 million in pretax GAAP earnings, from continuing operations for the first quarter. These operations have disappointed us, when baselined against what we were hoping for strategically, in getting into this business. The segment continues to undergo major changes. Last quarter we marked over a hundred store fronts as available for sale, and we are still actively pursuing the sale of those stores. Also at the end of the April, we executed a sale of our 81 Texas locations. After removing the Texas stores, and the 104 locations from the six states that are still held for sale, we now operate 325 retail store fronts in 8 states, and the U.K. From the very beginning our plan was to offer the customers, using these products, many more options than they have had in the past. Our belief was that by doing this, we would reduce their 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 monoline 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 store fronts.

Moving onto our auto finance segment, we posted a GAAP loss of $3.8 million in the first quarter, due to the fixed cost where occurring 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 infrastructure cost that we have incurred to get to scale within this business. Historically these businesses have had attractive growth opportunities in economic downturns. We know that 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 U.K. on loan-- online micro loan operations in our other segment. Since our acquisition of this business, we have experienced strong marginal IROs on our loan investments within MEM, and the recent implementation of our credit card segments, vintage based 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 to provide loan loss allowances on balanced bills. Loan losses are quite high at 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 permit 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 store fronts, 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. And our 10 plus years at CompuCredit, we have made more money from decisions made during economic downturns, than 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 for 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

Thank you, David. Let me begin by addressing the obvious disparity between our first quarter GAAP earnings and 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 based fluctuations, and peak charge-off vintage effects of our lower tier credit card receivables that David previously discussed, specifically as we had expected, we experienced significant levels of lower tier credit card receivable charge-offs in the first quarter. As the lower tier accounts included within a 1.5 million of credit card account additions in the second quarter and third quarters of 2007, followed their expected vintage curve performance, and reached peak charge-off levels eight to nine 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 and fees on 90 plus day late stage delinquent accounts. Lastly, David mentioned that our early stage delinquency 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 also the way our managed earnings.

To contrast our GAAP results, each of the above factors had the same affect, as the managed earnings affects on our income from retained interest and credit card receivable securitized. However, in determining the fair book value of our retained interest in our securitized credit card receivables at of December 31, 2007 we had taken these factors into account, in determining our evaluation assumptions at that date. in valuing our retained interest at March 31, 2008 the going forward view as to the income and cash flows that will be generated, from the March 31, 2008 receivables, necessarily excludes all the charge-offs, and 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 their December 31, 2007 fair value, served to offset the peak vintage related actual charge-off and fee depression results, that we experienced with respect to our lower tier credit card receivables, in determining our first quarter managed earning.

We also expect the same managed versus GAAP earnings interplay in the second quarter of this year. The March 31, 2008 fair value of our retained interest in credit card receivables securitized, is based on valuation assumptions that fully account for the peak vintage charge-off effects of the lower tier credit card credit card receivables in the second quarter, whereas our June 30, 2008 fair value calculations will necessarily exclude these effects, 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 increase in the fair value of our retained interest and securitized credit card receivables at June 30, 2008, that will offset the peak vintage related actual charge-off of depression results that we expect to experience, with respect to our lower tiered 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 specifics 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% from the first quarter of last year. All the factors that we have previously discussed, served to depress our first quarter 2008 net interest margin, these same factors also caused our 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-off 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 adjusted-- our managed receivable statistics, is our 60 plus 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 has reached or were reaching their 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 projected to fall significantly for first quarter levels, by the end of the second quarter 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 our liquidity situation will allow.

As such, we expect much improved managed 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 margin, and other income ratios, and significantly lower delinquency and charge-off levels, in the last two quarters of this year. Evidencing some optimism here, is data that you can refer to within our credit card segment table, in the 10-Q we filed today. Looking at the credit card delinquency statistics noted in that table, you can see that the percentage of credit card accounts, that are 31 to 90 days delinquent, for our 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 goodwill and (inaudible) charges within our retail micro-loan segment, and a significant fourth quarter charitable contribution, we do know that 350 basis points 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 in marketing, in this year's first quarter, than last year's first quarter. A couple of key capital related benchmarks, are equity to managed receivables ratio, which at 20.9% as of March 31, is up 170 basis points over its level at December 31.

Additionally our book value per share stands at $16.60 per share at March 31, which is slightly down from December 31, due principally to employee compensation related share grants in the first quarter. As we've noted throughout this call, our principle goal in this environment is to protect the $16.60 book value per share that we have 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 stimulus package, under which the IRS is sending refund checks out, to a sizable 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, at our current marketing levels, we can reasonably well position in this liquidity environment, because our receivables are performing well, and because of the size and nature of our receivables, match us well, with our current borrowing capacity. Never the less, 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, of reallocating our capital to those parts of our business, that have demonstrated the best proven IRRs, with the lowest financial and operating risk. Moreover, we continue to look for ways to drive greater efficiency and cost reductions within all of our businesses, and while there still 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 marginal IRRs in the capital we are deploying. 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.

(OPERATOR INSTRUCTIONS). And the first question comes from the line of Sameer Gokhale, from KBW. You may proceed.

Thank you. Just had a few questions, J. Paul the first one is for you. Have you guys-- has the company hit any triggers in securitizations-- I haven't been through the entire Q yet, but it seems like you have not. Can you just clarify for us if you have hit any triggers in the securitizations?

No, absolutely, Sameer.

I think in terms of funding, and given what has happened in the funding markets, I think David had talked about how the liquidity markets have turned, and we have all seen that. Specifically, when you are talking to some of your bank partners, are you seeing any of them balk at providing you funding facilities? Are they saying that given your high charge-off rates is there anything making them nervous? We are seeing in the markets some sub prime order finance securitizations getting done, things seem to be flowing a little bit. I would love to get your thoughts on exactly why you still feel very cautious on the funding markets?

Actually, I think our banks that have facilities with us, are still pretty pleased with the performance, and the assets we have with them. I think the issue there is that, we have not sensed that there is 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 of-- we have some coming up-- a small deal coming up in September of this year, and the next one doesn't come up until March of next year.

It has been interesting to us, and from the way we are-- the approach we are 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 are convinced 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 just will err on the side of caution, to avoid being in that position.

That is helpful, and then J. Paul if you could walk us through, I know you gave us how much liquidity the company has access to at the end of the quarter, including cash on balance sheet and draws, can you compare that to the-- I guess there is a securitization facility maturing in September, what if that facility is not renewed, are you going to be able to find a new facility to replace that one, as well as debt that's maturing, through the end of this year, how do you expect the cash balances to work out from current levels? Can you just walk us through the liquidity position, that would be helpful?

Specifically towards your comment towards the September facility, that's the one David referred to, that is a one-year conduit that comes up for renewal in September. There really is no immediate need for the capacity that, that facility provides. Although if you look out, at a longer term basis, into late 2009, we would like to have that capacity, and it is a very important relationship to us that we would like to continue. This is a facility with B of A, and they have been with us since the beginning of the company, with this facility, 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 as I mentioned, we are in a good position of having purchase portfolios that 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.

So in some of these facilities that are maturing, in September of '08, you have drawn against that facility, right? How much is outstanding on that facility?

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'll recall, we have the Merrill Lynch facility, that has $750 million in capacity and a higher advance rate, than some of our other facilities, and that is essentially where some of that fell between our actual cash balance of the 184, and the draw potential of the 270 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 facility.

Okay, that's helpful. Thank you very much.

And the next question comes from the line of Carl Drake, from SunTrust. You may proceed.

Good afternoon. Question on-- J. Paul, if you 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. First question is, did the charge-off rate, or the fee charge-off rate exceed your expectations for this quarter? And then second, is maybe if you could give us some idea of where that ratio might settle out? Some type of sustainable level fee income after the peak charge-offs, and any other guidance you can give us on other ratios, once things normalize, would be great, thanks.

Carl, I'll get the first part of your question, which the loss rates-- the charge-off rates for the quarter, came in pretty close to right in line where we 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. So that would reduce the fee income some, and we also had a little bit more in the paydown, just a little bit of the deleveraging of the portfolio than we had forecasted, and I think that's just probably has to do a little bit with the economy, and what's going on, people paying down a little bit, and the like.

Carl, I guess what I would tell you, not just on the other income ratio, 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 they will return to the more normal levels that you would have 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.

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

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

So the rest of the ratios might recover back to normalized ranges in 07?

Yes.

And by the third quarter of this year?

As a general matter, yes.

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, I might and given the $300 million reduction, should I expect that you are not going to perhaps get back to 4.1 billion, given your goal and focus on liquidity and book value?

No, unless something fairly dramatic on the upside changes we now think we will have sort of a declining portfolio for the remainder of the year, not at the same rate as the first quarter because of the charge-offs that will accrue, as well as the tax payments, but we would expect the portfolio to be smaller at year end than it is today.

Okay.

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 latter half of the year. It stabilizes in the latter half of the year.

The last question is, did I hear you mention the loss or some kind-- 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?

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

Okay. Thank you.

The next question comes from the line of John Hecht from JMP Securities. You may proceed.

Good afternoon. Thanks for taking my questions. I think the first question is a little bit of a tag on to some of the things that Carl was talking about. With respect to the large drop in the other income ratio, and I guess in consideration of the peak charge-offs you are going through in the sub prime card accounts, are we in affect seeing a make shift back towards the higher end of your customer base, and with that should we see normalized ratios along the lines of those before you started going deeper into-- or more aggressively into the sub prime accounts?

No, I think what you are seeing is primarily the vintage spaces. I think you can 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 we are growing, or not growing, but we are adding some of our upper tier accounts, but we are still adding-- the accounts that we add are still the majority in the lower tier of our business. We don't see that-- 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 are not really looking to go back to a portfolio, more weighted towards the upper tier.

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

Sure.

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

I will let Richard handle the mechanics of that question. I will tell you that across all the portfolios, we really have seen the performance come in as we would have expected. Richard, I don't know if you have anything--

Not a whole lot to add there. I guess the best way to aggregate it, would be to look at all U.S. credit cards, other than the deep sub prime, and if you aggregate those and look at them, you basically saw a slight improvement in performance year-over-year. So not with-standing 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 have talked on quite a bit obviously, the vintage effect was there, but the vintages were in line with the modeling that we have done.

So as David said in his script, we are 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 U.K., we have 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 U.K., I think we probably bought more of a collection focus, on that portfolio.

Last question, given where you bought the bulk of your portfolio, or your new customers originate in the bulk of your new customers last year, and what we construe is a six to nine month peak charge-off level, we should expect-- even though you're going continue to have high charge-offs in Q2, they should drop off considerably, by my math from Q1, is that correct?

We are forecasting a drop, but not what I would characterize as extraordinarily sizable. We put on quite a bit of accounts in Q3 of last year.

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

Okay. Thank you, guys, very much.

And the next question comes from the line of Rich Shane, from Jefferies. You may proceed.

Thanks, guys my questions have been asked and answered.

And at this time, we don't have any further questions. This concludes the presentation for today. We thank you for your participation. You may now disconnect