CompuCredit Corp. Q3 2007 Earnings Call Transcript

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 |  About: Atlanticus Holdings Corp. (ATLC)
by: SA Transcripts

CompuCredit Corp. (CCRT) Q3 2007 Earnings Call November 5, 2007 5:00 PM ET

Operator

Good day ladies and gentlemen, and welcome to the ThirdQuarter 2007 CompuCredit Earnings Conference Call. My name is Stacey and I willbe your moderator for today (Operator Instructions). As a reminder, thisconference is being recorded for replay purposes.

I would now like to turn presentation over to your host fortoday, Mr. Jay Putnam, Director of Investor Relations. Please proceed sir.

Jay Putnam

Thank you. Good afternoon and welcome to CompuCreditCorporation's third quarter 2007 earnings call. Before we get started I wouldlike to remind you that some of our comments today will be forward-lookingstatements.

These forward-looking statements include all statements ofour plans, beliefs or expectations of future results or developments, such asthe performance of our credit card receivables, including new account growth;net interest margin; other income ratio and charge-off levels; financialperformance and growth expectations for all of our business segments;acquisitions of portfolios, assets or complementary businesses; our expectedlevels of marketing expense; capital raising plans; earnings expectations andgeneral economic conditions.

For information regarding some of the more importingimportant factors that may cause actual results to differ materially from thosereflected in the forward-looking statements that we make today, you should readthe Forward-Looking Information section and the Risk Factors on Form 10-Q forthe quarter ended September 30, 2007.

Thanks again for your interest in CompuCredit. Please feelfree to contact me if you ever have any questions you would like to discuss.You also may access our website to obtain a hardcopy of the press release andour financial statements, to view our risk factors or to listen to an archivedversion of this call.

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

David Hanna

Thanks Jay and thanks to you all for joining us today. Todaywe will review our performance during the quarter, update you on the currentstate of our business and share some thoughts about our outlook. J. PaulWhitehead, our CFO, will follow me to discuss the financial metrics for thequarter in greater detail.

After our prepared remarks we will be glad to answer anyquestions that you may have. Today we reported managed earnings for the thirdquarter of $46.5 million or $0.95 per share, and a GAAP loss of $53.2 millionor $1.10 per share.

The discrepancy between GAAP and managed earnings isprincipally due to the buildup of our allowances for loan losses attributableto the significant receivables growth we have experienced related to our highyielding, lower tier credit cards, our online and storefront Micro-Loans, andour auto finance loan originations.

Highlighting some of our key managed stats for the quarter;our net interest margin fell 30 basis points from the second quarter to 18.6%in the third quarter. Our other income ratio increased from 12.3% in the secondquarter to 17.2% in the third quarter on the strength of the new accountadditions we have had this year. Our adjusted net charge-off rate climbed 100basis points from 9.2% in the second quarter of 2007 to 10.2% in the thirdquarter.

However, our net charge-off rate actually decreased 250basis points. We expected these results based on the affects of our secondquarter U.K. credit cards acquisition from Barclaycard. Significant secondquarter net charge-offs of balances that were at or near charge-off at the timeof the acquisition were significantly offset in the second quarter by purchaseprice discounts to reflect our actual economic charge-off results.

We experienced fewer U.K. portfolio net charge-offs in thethird quarter, thereby resulting in a decrease in our net charge-off rate andan increase in our adjusted charge-off rate, as the mix of our third quartercharge-offs was geared more toward our originated portfolios than as purchasedU.K. portfolio.

Reflective our continuing mix change, under which a greaterpercentage of our receivables is now comprised of our lower tier credit cardofferings, with higher yields and higher delinquencies and charge-offs, our 60days plus delinquency rate was 14.6% at September 30, 2007 compared to 13.2% atJune 30, 2007 and 14.0% on September 30, of 2006. Our core business operationsperformed in line with our expectations and guidance for the quarter.

However, similar to last quarter, dislocations in themortgage and asset-backed securities markets led to a loss on investments thatwe previously made in asset-backed securities, a loss that depressed both ourrecorded after-tax, managed and GAAP results by $21.2 million or $0.43 pershare.

Our remaining exposure to further loss on this investment isless than $12 million pretax, and we saw some stabilization in the value ofthese investments in September. Our Credit Cards segment achieved recordaccount activations from our originated card offerings, adding over 500,000 netnew accounts during the quarter.

We added an average of 750,000 gross new accounts perquarter in the second and third quarters of this year as we ramped our directmail, telemarketing and Internet campaigns to new levels to the largepopulation of financially underserved consumers.

While we believe that the current environment supportsaccount additions that are at or near the levels we added in the second andthird quarters, the disruption that we have seen in the global liquiditymarkets caused us to pull back our marketing efforts in mid to late August.

And while we were able to obtain $500 million in capitalmarkets funding during the third quarter, and another $100 million of expandedcapacity just last week on one of the facilities financing our credit cardreceivables, we felt this pull back was a prudent measure given the uncertaintyin the liquidity markets.

Let me also say that while there is uncertainty in theliquidity markets, we haven't seen meaningful changes in the payment activityor credit quality within our receivables. We feel good about our customers'credit worthiness at this juncture, and we also feel good about the things wecan control such as who we land to, how we manage accounts and how we collectand service from our customers. Our ability to grow wisely is predicated on ourability to fund our receivables.

We have seen other specialty finance companies makeassumptions about future funding only then to be surprised. Our approach ismore conservative, in that we try and have our funding lined up for 18 to 24months in the future on a rolling basis. We will increase or decrease ourmarketing efforts based on both what the customer appetite is as well as whatour funding commitments are.

We have been working with several of our funding partners,as well as some potential new partners, on lining up new funding to enable usto take advantage of great opportunities in the market, and we are hopeful thatwe will be able to obtain additional growth capital under acceptable pricingand terms during the fourth quarter of this year.

And till then we plan to reduce our target marketing levelsto between 150,000 and 200,000 gross account additions per quarter while weassess the market. At the end of the third quarter we had $275 million ofavailable liquidity, which coupled with last week's extension and $100 millionexpansion of one of our credit card facilities, provides us with enough runwayat these marketing levels for the foreseeable future with no additional fundingneeds.

Our past experiences also lead us to believe that we canobtain the additional liquidity necessary to take advantage of further creditcard portfolio acquisitions. There seems to be a fair bit of activity out thereright now as a variety of financial institutions are focused on shoring uptheir mortgage and other product operations.

Although not highly rational in our belief, we see a numberof these institutions cutting back on credit card marketing and looking atpotential sales of portions of their credit card portfolios.

Purchasing portfolios has been a very successful venture forus in the past, largely due to the expertise we bring to the table in accountmanagement and collections, and we are well positioned to do additional creditcard portfolio acquisitions in the U.S. and in the U.K. We will continue tostress diligent underwriting philosophies and expense efficiency initiatives todeliver sound financial results for our credit cards segment and take advantageof opportunities as they present themselves.

With the long view that we take and the stock ownership thatwe possess as a management team, we feel this is the best way to navigate thecurrent landscape. Our Auto Finance segment posted a GAAP loss for the quarterof $11.7 million pretax. Some of this loss was related in changes to estimatesof collections on the Patelco portfolio that we purchased along with ouracquisition of ACC, and a commensurate adjustment to write-down the value ofthat portfolio.

However, much of the loss is associated with the originationgrowth within our ACC and Just Right Auto Sales subsidiaries, growth that youcan see in our Auto Finance segment information, with every principal outlaythat we make as we market and growth originations within the Auto Financesegment.

We must immediately post an allowance for uncollectible loansand fees under GAAP as a reduction of our loans receivable, while we areprecluded from recognizing under GAAP the I/O strip value inherent within theseoriginations.

With our current growth plans, and based on fixed costs thatare being incurred upfront to facilitate our ramp up, as well as the upfrontrecording of loan loss allowances, we estimate that we will experience GAAPlosses within the Auto Finance segment through at least the end of 2008.

Nevertheless, we feel good about the potential for our AutoFinance segment businesses. ACC just completed a $200 million financingfacility to help fund its growth. And Just Right Auto Sales, our retail dealer,has grown to 10 locations, and has performed at or above our early expectationsfor this business.

Now let me move on to our Retail Micro-Loans segment, whichposted its fifth straight quarter of positive GAAP income in the third quarter.Gross revenues increased 16% over last year's third quarter, as our multiproduct line strategy continues to produce promising results in both our newdomestic and U.K. storefronts, and raises our expectations of increasedprofitability in the coming quarters.

We also opened 26 retail storefronts in the third quarter,the startup of which and losses on which account for much of the decrease inthird quarter net income compared to the third quarter of last year. We alsoexperienced increased charge-offs and an increase in our allowance foruncollectible loans and fees in this year's third quarter; consistent with trendswe have seen across the industry.

Continuing our segment discussion, our Investments inpreviously charged-off receivables subsidiaries posted another quarter of solidfinancial results, raising its third quarter pretax GAAP income 20.5% from lastyear's third quarter.

This growth is coming from increased volumes of charge offaccounts sold under a five-year forward flow agreement and continued growth inour balance transfer program and chapter 13 paper purchasing activities.

Finally, our Other segment recorded a GAAP loss of $5.2million on net revenue of $3.6 million. Currently the most significantoperation within our Other segment is our U.K. Internet-based Micro-LoanCompany called MEM, which we expect will achieve profitability in 2008.

Based on third quarter changes in the global liquidityenvironment, we have discontinued at least temporarily if not permanently, someof our Other segment's new product development activities, including ourunderwriting, servicing, collecting and investing in assets secured, consumerfinanced receivables, such as loans secured by motorcycles, all-terrainvehicles, personal watercraft and the like, and our testing of an online mallof consumer electronics and other products for which we would have provided theunderlying consumer financing.

We constantly review our various business activities withinthe Other segment to determine whether they represent an appropriate allocationof capital. And in the current liquidity environment we expect reduced capitalallocations and spending levels within the Other segment.

In the current environment we believe that organic creditcard growth, potential portfolio purchases and potential stock purchases arethe best usages of our capital. Before I turn it over to J. Paul, I would liketo summarize our perspective on the current situation in the liquidity markets.

The highly publicized problems in the sub-prime mortgagelending business data and the related secondary markets created significantdislocation in the global liquidity markets beginning in mid-August thissummer.

While these problems appear to reflect problems distinctlyrelated to the subprime mortgage industry, investors in that industry also areinvestors in other subprime asset classes. And one repercussion from theproblems in the subprime mortgage industry has been reluctance, albeittemporarily, by many investors to invest in other subprime asset classes, atleast at the levels at which, and with the terms under which, they previouslyinvested.

We have acted swiftly and decisively in lowering ourmarketing investments to conserve our liquidity to protect against a prolongedor worsening dislocation in the liquidity markets. Although we are confidentthe liquidity markets will return to more traditional levels in due course,we're not able to predict when that will occur.

We happen to believe, however, that there is a good bit ofliquidity out there that is looking for a decent return. And we also envision ascenario under which the subprime mortgage pull back may actually supportgreater investor liquidity allocations to other asset classes like creditcards.

We also believe we are already seeing another positiveaspect of the current liquidity environment for our business. We have seen apull back in marketing efforts among some of our competitors, who are dealingwith their own subprime mortgage problems, thereby creating marketingopportunities for us, assuming that we have the right liquidity.

These opportunities, along with our track record of successin managing and purchasing portfolios through periods of weakness in theliquidity markets and the economy, creates a reasonable sense of optimism forus. As I noted previously, we have adequate available liquidity for our currentneeds and for modest growth.

And we hope to complete additional financings in the fourthquarter that will allow us to resume growth at levels similar to the levels wehave experienced in the second and third quarters of this year, levels that webelieve currently are supported within our consumer base.

Thanks to you all for joining our call today, and I will nowturn things over to J. Paul for his review.

J. Paul Whitehead

Thank you David. First I will review some of our keyfinancial operating and statistical data, and then share more color on ourfinancial performance. To recap our results for the third quarter, today wereported managed earnings of $46.5 million or $0.95 per share, and a GAAP netloss of $53.2 million or $1.10 per share.

Trends into our key managed statistical measures included adecline in our net interest margin to 18.6% for the third quarter of 2007,compared to 18.9% in the second quarter of 2007, and 26% from last year's thirdquarter; an increase in our other income ratio to 17.2% for the third quarterof 2007 compared to 12.3% in the second quarter of 2007, and 15.7% from lastyear's third quarter.

An increase in our adjusted charge-off rate to 10.2% for thethird quarter of 2007 compared to 9.2% in the second quarter of 2007, and 9.4%from last year's third quarter; and an increase in our 60 plus daydelinquencies to 14.6% as of September 30, 2007 compared to 13.2% as of June30, 2007, and 14% as of September 30, 2006.

Our modest decline in net interest margin between the secondand third quarters of this year principally reflects a third quarterreclassification of our MEM subsidiary's revenues from our net interest marginto our other operating income category to align MEM's revenue classificationwith that of our domestic Retail Micro-Loan operations.

This $2.2 million third quarter reclassification creates theappearance of an over 20 basis point reduction from our second quarter netinterest margin, when in fact our net interest margin would have been flatquarter-over-quarter without this reclassification.

Our third quarter net interest margin also is depressedrelative to prior quarter comparisons based on higher draws that we madeagainst our financing facilities in the third quarter. Some of which we drew inAugust based on news of dislocation in the global liquidity markets and withrespect to which we are earning minimal yields as the underlying drawn fundsare invested in cash or short-term investments with yields less than our costof funds under our financing facilities.

We see this inefficiency as being only temporary as weexpect to deploy these excess draw funds to grow our receivables base over thecoming weeks and months. We should also note that our April 2007 UK portfolioacquisition has significantly muted our net interest margin, as well as ourother income ratio, relative to our prior year third quarter ratios, forexample.

While ratios associated with the UK portfolio are performingas expected, the yields associated with these card offerings are much lowerthan those of our originated accounts underlying our lower tier receivables. Asthe UK portfolio receivables continue to liquidate over time, the receivablesassociated with our lower tier originated accounts continue to grow; we expectthat these ratios will continue to grow.

The improvement in our other income ratio to 17.2% relativeto last year's third quarter ratio of 15.7%, and this year's second quarterratio of 12.3% is consistent with the significant growth we achieved over thesecond and third quarters in our lower tier receivables.

Most of the revenues generated from these cards flow throughour other income category. Considering that our other income ratio alsoincludes the effects of realized and unrealized losses on our portfolio of ABSbonds, which were greater in the third quarter than in the second quarter ofthis year, we were pleased with a jump in our other income ratio.

Computed without giving affect to the $37.4 million oflosses, losses that are unrelated to our core business operations, our thirdquarter other income ratio would have been 20.9%.

David previously addressed the 100 basis point increase inour third quarter adjusted charge-off rate as compared to the second quarterthis year. Despite a 250-basis point drop in our net charge-off rate betweenthese periods. This expected increase in our adjusted charge-off ratio iscaused by the treatment of discount on the purchase of our UK portfolio.

Our purchase price discount on this portfolio is used tooffset net charge-offs to arrive at our adjusted or true economic charge-offs.As time addresses and the UK portfolio liquidates, we will see net charge-offsand adjusted charge-offs converge as the impact of purchased discountsdiminishes.

Over time a greater percentage of our charge-offs in the UKportfolio will be made up of balances that we have fully funded for cardholderpurchases, as opposed to balances for which we paid a discounted purchase pricein our Barclaycard purchase acquisition.

Finally, the rise in our 60 plus day delinquencies in thethird quarter was expected based on the mix change that we continue toexperience, with a large and growing proportion of our managed receivablesbeing comprised of those receivables associated with our lower tier customers.

Relative to our 14.6% 60 plus day delinquency rate atSeptember 30th, our 13.2% rate on June 30 of this year was significantly mutedby our second quarter 2007 UK portfolio acquisition.

The receivables of which bear delinquencies significantlybelow delinquency levels for our receivables associated with our originatedlower tier card offerings. That is to say that the UK portfolio acquisition hadthe effect of offsetting the otherwise expected significant increase indelinquencies associated with our mix change toward a greater percentage of ourreceivables being comprised of those associated with our lower tier products.

To focus a bit on our expectations for our various managedratios in the future, these ratios are highly sensitive to our growthexpectations and marking levels, which as David mentioned, are dependent on ourability to obtain additional growth capacity under our financing andsecuritization facilities.

David also noted that recent marking of our lower tiercredit card offerings at historically high levels generated an average of750,000 gross account additions during each of the second and third quarters of2007, along with significant growth in new receivables that have not yetseasoned through delinquency and charge-off categories.

The all time high growth rates for these new receivables,coupled with our recent reduction in marking levels, which are now targeted toproduce between 150,000 and 200,000 gross account addition per quarter, isexpected to cause rising delinquencies as the unusually large vintages of secondand third quarter 2000 receivables season through delinquency categories and onto peak charge-offs levels by a 8 to 9 months after card activation.

Moving on to our GAAP financial statements, I would inviteyou to review our 10-Q filed today, which includes an in-depth look into ourdiffering third quarter and year-to-date GAAP results between 2007 and 2006.And additional details underlying each of the many factors affecting ourreported GAAP earnings.

The most significant of these factors is probably theunprecedented growth in our lower tier receivables, which has resulted in ourincreasing allowances for un-collectible loans and fees receivable quiteconsiderably, thereby resulting in significant provisions for loan losses inour income statements.

The buildup of loan loss allowances on these receivables hasgenerated sizable recent discrepancies between our GAAP and managed results,discrepancies that are particularly unusual in the industry, as our lower tiercredit card receivables generate levels of credit losses well in excess ofthose receivables held by other credit card issuers.

But have yields and generate IRRs that also are well inexcess of those receivables held by other credit card issuers. GAAP accountingis unfortunately a one-way street, and than in our case, that it produces netasset values significantly below the economic value of our assets, as theunusually large I/O strip values on our lower tier receivables are excludedfrom their GAAP values.

Turning now to some of our expense items, which are the sameunder both GAAP and managed results. Our third quarter marketing expense of$39.9 million declined $11 million in the second quarter's record $50.9 millionexpense as we pulled back our marketing levels in August.

We remained pleased with our response in card activationrates and competitive landscape. And as David said, we have a marketing plantargeting 150,00 to 200,000 of gross activated account additions per quarterthat takes us out into the foreseeable future with no need for additionalfunding.

Under this plan you can expect to see a significant decreasein fourth quarter marketing expense relative to levels in the first threequarters of this year. Our 14.1% other operating ratio for the third quarterdeclined 30 basis points from its 14.4% level in the second quarter.

During the quarter we continued to investigate areas forimproving our efficiency and servicing our accounts and to adjust ourinitiatives and corresponding resource levels to fit some of our scaled downefforts in the current liquidity environment.

Notably our operating ratio would have been even lower inthe third quarter had it not been for a $4.8 million charge that we tookrelated to our lease commitment on our previous corporate headquarters, whichwe vacated in August upon relocation to our new corporate headquarters.

The $4.8 million lease related charge was expected cominginto the third quarter, and reflects our inability to recover throughoffsetting sublease cash flows our entire lease obligation on our former space.

This charge also was a rational consequence of our decisionto lock in a long-term lower cost per square foot with our move to our newcorporate headquarters. Also noteworthy is the fact that we were able to bringdown our third quarter operating ratio when it logically should have increased,all other factors being equal, based on our continuing mix change toward agreater percentage of our managed receivables being comprised of lower balancedaccounts.

Recapping our liquidity picture moving into the fourthquarter, we had approximately $270 million of available liquidity at the end ofthe third quarter. This available liquidity is represented by unrestricted cashbalances, draw potential against our cap collateral base within our originatedportfolio master trust, and draw potential against our collateral basesupported by our structured financing facilities, secured by our lower tiercredit card receivables.

Based on our current marketing plans which are targeted toproduce between 150,000 to 200,000 a gross quarterly account additions and theexcess capacity available under our financing and securitization facilities,which enforces our ability to both draw against our current collateral base ofreceivables and continue to grow our collateral base of receivables againstwhich we can make future draws.

We expect our available liquidity to be sufficient to fundour operating funding needs for the foreseeable future. We also are pursuing anumber of new financing facilities and liquidity sources that will support moreaggressive marketing levels and opportunities that we believe are attractive inthe current environment.

While we cannot provide any assurances, we anticipate beingable to complete transactions to add to our desired growth capital anacceptable terms and pricings during the fourth quarter of this year. Overall,we remain pleased with the fundamentals of our core business and the managedearnings growth we experienced between the second and third quarters.

And while our third quarter results were very much in linewith our expectations, we are adjusting our fourth quarter managed earningsestimates principally based on the effects of our decision in August to curtailour growth and conserve capital given uncertainties in the Capital Markets,further account management actions we plan to undertake in the fourth quarterto address negative amortization and our Board of Directors' decision in itsmeeting last Friday to approve a $6 million charitable contribution under our2007 shareholder designation plan.

As computed, assuming no further impairment charges on ourABS investments, we now expect our fourth quarter-managed earnings to come inbetween $0.80 and $0.90 per share.

Let me conclude now by thanking you all on behalf of bothDavid and me for your interest in CompuCredit and your participation in ourthird quarter earnings call. With that, we would be happy to entertainquestions at this time.

Question-and-Answer Session

Operator

(Operator Instructions) Your first come from the line ofSameer Gokhale with KBW.

Please proceed.

Sameer Gokhale - KBW

Hi, thank you. I just had a question about the, you madesome comments about the health of the consumer and maybe you weren't seeinganything yet in your portfolio. I think historically you have said that basedon what happened in your portfolio you can figure out how consumers are goingto be behave six to 12 months out.

Can you give us some more commentary on exactly what you'reseeing there as far as payment rates and most currently after the end of thequarter? And how confident you feel in the health of the consumer goingforward? Thank you.

J. Paul Whitehead

Sameer, is as I think, you know we look at all of our creditcard portfolios, both at a top level as well as looking at everything on avintage basis. And especially in some of the lower tier products looking at thevintage analysis helps us to really determine how things are coming in based onprevious vintages and the like.

And to date, we are not really seeing meaningful problemsanywhere in our originated or in receivables that we have purchased. We’ve notseen things that are outside of the expectation bands that we have for any ofour portfolios.

So, despite what a lot of the noise we hear going on in themortgage market and the like, we can't really tell what is going to happen withthe overall consumer, but with our consumer base as yet we haven't seen thingsthat give us cause for concern.

Sameer Gokhale - KBW

Okay. And then, I know you’ve been asked this fromtime-to-time, and you’ve been somewhat constrained in your ability to say awhole lot about this. But I think it would help investors I think to have somesense for what the FDIC is actually doing in terms of the investigation intoyour relationship with CB&T.

Where does it stand? What are they looking at this point? Ithink it’s been a year and a half since they have been in there now. So, canyou give us any sense for what they might be looking at this point in time?

J. Paul Whitehead

The FDIC, as you point out, over the last year and hascompleted an exhaustive review of our entire business and practices as theypertain to our relationship with CB&T or with other banks. And as ourexpectations have been for some time, we expect that we will resolve anyquestions and come to a resolution with the FDIC, hopefully in the near term.

But with the federal government on the other side, we don'tget to set the time line; they have a lot more ability to do so. But we thinkthat we will get to a resolution with them that satisfy all parties.

Sameer Gokhale - KBW

Okay. Then just my last question. I think you’ve givenguidance for Q4 of $0.80 to $0.90, and in there was a $6 million charitablecontribution. I think that works out to roughly about $0.08 or so a share. Butthe rest of it I think you said was partly because of curtailing new accountoriginations.

It just seems like a pretty big drop in expected earningsjust from one quarter less or maybe a couple quarters less of marketing. So,can you help us get a sense for is there anything else going on from a creditdynamic? Or how should we think about this, because going from your run ratefor this quarter down to the $0.80 to $0.90 seems like a relatively big dropsequentially?

David Hanna

Yes. I think certainly coming from quarters in which we hadmarketed at 750,000 gross account adds for quarter, dropping that down as wehave to the 150,000 to 200,000 account add level has a significant affect onour other income ratio, net interest margin.

And then as we mentioned in the call, you began to see someof the effects of some of those high volume vintages to begin flow through ourearnings in the fourth quarter and that certainly has an effect on ourexpectations with regard to managed earnings in the fourth quarter.

We also are going to be making some account managementchanges, taking some account management actions in the fourth quarter toaddress the ongoing industry wide issue associated with negative amortization.And that is going to cause some marginal reduction in our fourth quarterearnings.

But I would say, echoing what J. Paul said, the lion's shareof that is due to the pretty dramatic reduction in marketing we expect in thefourth quarter versus the second or third quarter.

Sameer Gokhale - KBW

Okay. Thank you.

Operator

Your next question comes from line of Dan Fannon with TopyCredit (ph). Please Proceed.

Dan Fannon - Topy Credit

Good afternoon guys. On the liquidity side, can you talkabout the terms of the transactions or the funding that you have received inthe quarter versus historically where they have been and what has changed? Thenalso let us know did you guys have any renewals coming up on any creditfacilities in the near term that you're going to have to go back to your banksto renew?

J. Paul Whitehead

Yes. We talk about the transactions that we did during thequarter and then just after the close of the quarter, or just last week that wecompleted, we completed a $300 million facility with a new lender in the middleof August.

And we were actually very pleased with the underlying termsat a time with respect to both advance rate and pricing. We’re really able toaccomplish that deal in a way that we thought represented some improvement inthe terms that we had achieved in the past associated with the particularportfolio underlying that piece of financing.

We have seen, we also did a $200 million facility as wementioned, for our Auto Finance, segment. And the terms here are disclosed inthe notes payable section of our 10-Q in our financial statements. But therehas been a little bit of widening of spreads there, but we are very pleasedwith the terms that we achieved on that $200 million deal and believe that itallows us to earn our desired returns within the Auto Finance business as wecrank up the originations there.

The deal that we just closed last week, it was an amendmentto our first facility that is supported by our lower tier credit cardreceivables. And it took that capacity up from $350 million to $450 million.Along with that change there were some changes to advance rates and pricing,which might be expected based on the increased capacity that we have with that lenderin a deal that has not been syndicated to outside parties.

So, we're borrowing more money, so there have been somemodest changes to advance rate and pricing there. Still with the pricing andthe terms that we have there and the underlying IRRs that we earn our lowertier credit card receivables products, we are very pleased with that financingand the additional capacity that gives us to grow.

That particular facility has been extended to March 2009. Itotherwise would have expired in March of 2008. So, towards your question ofwhether there are any significant re-financings that we need to undertake orextensions, there really are not at this time. We will get into what we thinkwill be our normal course extension of our BoA conduit in September of nextyear.

And as we mentioned in the call, we think we got all theboxes checked to grow at a decent rate, as David mentioned and I mentioned,without having to do anything else from a liquidity standpoint.

Dan Fannon - Topy Credit

That's helpful. And then David, you mentioned I guess in thescenario of a more healthy kind of liquidity environment about potentialpurchasing of receivables.

I was wondering, if you guys are already in discussions withbanks or kind of where you our in that process of digging around to see what isout there or what the sale process might be or partners in which you might beable to team up with for purchase?

Then you also mentioned stock purchases as another use ofcapital. I am wondering, what you guy’s appetite is for purchasing your ownstock, given your heavy inside ownership already?

David Hanna

Well, I think that your first question about purchasingportfolios, we believe that and over our history even during very tight creditmarkets back in 2001 timeframe and things like that, we have always been ableto finance portfolio purchases under terms that we found to be prettyattractive.

And we are looking and talking with various parties, lookingfor potential new portfolios to purchase. And we do not believe that financingwill be an impediment to us as we move forward on that.

In terms of looking at using some of our capital torepurchase stock, as anybody who follows our Company knows, that stock priceshave taken a pretty good big dive over the last month.

And when we look and make estimates about what we mightspend our capital on, whether it is new accounts we originate, whether it isaccounts we might buy through a portfolio purchase or whether it is purchasingour own stock, sometimes we think that purchasing our own stock is probably thebest move in that scenario.

Dan Fannon - Topy Credit

Okay, Thank you.

Operator

The next question comes from the line of Moshe Orenbuch withCredit Suisse. Please proceed.

Moshe Orenbuch - Credit Suisse

Thanks, a couple of things. With respect to just drillingdown a little more on the fourth quarter, should we expect to see asignificant, like as in 75% or 70% reduction in the marketing expense or doesit not come down that quickly?

David Hanna

We have, I think the number that you put on it is maybe atad high, but it is in that ballpark.

Moshe Orenbuch - Credit Suisse

On a separate issue, could you talk a little bit about, youhave already talked about it just in response to the last question a littleabout portfolio acquisitions? What actually has been out there? Is there anyway you can characterize the mindset of any of the players? And who is lookingin a more aggressive way to sell now than has been, what types of companies?

David Hanna

Well, I think that at least in our company's history,whenever there has been concern about what is going on with the consumermarket, has been the time when people look to potentially sell portfolios.

And so while, as I mentioned earlier, we're not seeingthings that concern us about our customer base, I think others may be seeingthat, others with a more prime like customer base, may be saying that andmaking decisions to at least explore offloading some of their credit cardportfolios.

I would hesitate to get into specific names and the like,but like I said, if you look over the last 10 years when there has been credittightening and consumer concerns has been where portfolio trades happened. Andthat is why we believe that there is a reasonable chance we will see some ofthat going forward.

Moshe Orenbuch - Credit Suisse

Just to get back, sorry to jump around like this, but to getback to the fourth quarter a little bit, I was thinking this through. I mean,you had been previously guiding to north of $1.65, and you've got $0.10 inthere I guess roughly, or a little less, from the charitable contribution,which wasn't in your earlier guidance.

It still seems like you're talking $0.60 to $0.70 weakerearnings. Yet you have also got maybe $0.30 or so in terms of lower marketing.So is that difference, is that primarily credit losses? Is there anything elsein there and I would be missing?

David Hanna

No. I think that as you look at our lower tier segment, theprofitability’s of that are highest in the first six months. And then you gothrough six months, nine months of your peak charge-off timing. And then youreturn to normalized profitability after that.

So you've got those factors, the lack of new accounts, aswell as some maturation of our older accounts and the like. But it is not oneof higher credit losses on the vintages and the like than what ourexpectations.

Moshe Orenbuch - Credit Suisse

Okay.

J. Paul Whitehead

I would also verify versus that with the ramp up inmarketing and the trajectory that we were on based on second and third quartermarketing spend and marketing levels, you would have seen that trend increaseand continue in the fourth quarter and there would have been even more accountadditions in the fourth quarter likely than in the second and the third, basedon the path that we were on, which obviously given David's point, would havecreated a good bit of income in the fourth quarter.

Moshe Orenbuch - Credit Suisse

Got you. Thanks.

Operator

Your next question comes from the line of David Hochstimwith Bear Stearns. Please proceed.

David Hochstim - Bear Stearns

Yeah, hi. I wonder, could you just give a sense of how muchin the net account growth there might be as you pull back on growth accountadditions? Is there anything different in the last two quarters new accountsthat would lead those to stay longer or leave faster?

J. Paul Whitehead

I think at the levels that we're talking about from amarketing perspective, we will likely see fairly modest account growth in thefourth quarter relative to the third quarter this year.

David Hanna

On a net basis.

J. Paul Whitehead

On a net basis. Yes.

David Hochstim - Bear Stearns

And then in the first quarter or second quarter would therestill be net account growth at the same level of originations, grossoriginations or it would sort of runoff?

David Hanna

Once again, our hope and our expectation is that we're goingto have funding in place to ramp back up our marketing in the first quarter.

David Hochstim - Bear Stearns

But you would probably have to have that pretty soon, ifyou're planning out over 18 months, wouldn't you?

David Hanna

Yes, we're planning the funding for 12 or 18 months, butonce we have the funding it doesn't take an awful long period of time to crankback up on the marketing.

David Hochstim - Bear Stearns

Okay. And could you just repeat what you said about the currentlevel of mortgage-related investments and where the market was at the end ofSeptember and what might have changed by the first week in November?

J. Paul Whitehead

One more time, I'm sorry.

David Hochstim - Bear Stearns

If you could just repeat what you have said about I didn'tfollow it all on the mortgage-related investments, how much was left atSeptember 30, how much the write-down was and I guess it is in other income or…?

J. Paul Whitehead

We had realized and unrealized losses of $37.4 million. Andthat is included within the other income ratio. And without those losses in theother income ratio, we would have, our other income ratio would have been20.9%.

And without those losses we would have been at about $1.38of managed earnings in the quarter as well, so just to clarify that point.

David Hanna

There is a little under $12 million left.

J. Paul Whitehead

Yes, a little bit under $12 million of investment value orcarrying costs left in our financial statements.

David Hochstim - Bear Stearns

And that was at September 30 or that is like …?

J. Paul Whitehead

As of September 30.

David Hochstim - Bear Stearns

And if you had to estimate how much has changed since then?

J. Paul Whitehead

Not of any material amount at all at this point, not basedon the information we have today.

David Hochstim - Bear Stearns

Okay. And how much of the losses are unrealized losses thatin theory can come back if cash flows …?

David Hanna

I don't have that number right in front of me right now.Give me a couple of seconds and then get the next questioner and I will getthat for you later.

David Hochstim - Bear Stearns

Okay. Thanks.

Unidentified Company Representative

Stella, please ask them the next question.

Operator

Your next question is comes from the line of Carl Drake withSunTrust Robinson Humphrey. Please proceed.

Carl Drake - SunTrust Robinson Humphrey

Thank you. Good afternoon. A couple of questions on theliquidity, J. Paul, are any of the liquidity constraints perhaps impacting yourmix of gross card adds going forward? In other words, is it more difficult to,I guess, is it more difficult to obtain lower tier financing versus your primefinancing?

J. Paul Whitehead

No, it’s not. Not at all. I have not had that experience.

Carl Drake - SunTrust Robinson Humphrey

So from a mix standpoint, even though at a much lower150,000 and 250,000, you don't expect to change the mix going forward?

David Hanna

The mix of marketing?

Carl Drake - SunTrust Robinson Humphrey

Yes, the type of card accounts that you are growing?

J. Paul Whitehead

No, I think, if you look at a percentage or a proportion ofour total marketing, it’s relatively comparable to what it was when we weremarketing at the higher level, between the near prime and the lower tieraccount marketing.

Carl Drake - SunTrust Robinson Humphrey

Is that a breakout then more than two-thirds lower tier,more like 75%, 80%?

J. Paul Whitehead

We really haven't disclosed that breakout specifically Paul,but I guess, I can lead you to looking at our receivables growth within ourlower tier product offering, and you can quickly get to the conclusion, if youlook at that versus our total managed receivables levels within the CreditCards segment, that a lot of the growth has come from the lower tier.

Carl Drake - SunTrust Robinson Humphrey

Okay. And second question on expense initiatives, there is alot of focus on efficiencies. You mentioned suspending some research anddevelopment. Maybe you could elaborate on the dollar amount of savings that wemight see if capital is not available to your liking in the fourth quarter?Would you mind, maybe would you take some more significant initiatives or doyou already have significant, maybe you can provide some color on the dollaramount of expense savings?

J. Paul Whitehead

Yes, without getting into specific dollar amounts, we tooksome actions as soon as the global liquidity disruption occurred in August thatwe feel really good about, in the way of looking at some of our personnel andsome of the investments that we had undertaken.

And really focusing more specifically on how do you bestallocate capital to the various investments and initiatives that we have inlight of an environment in which we may be constrained for some period time onthe amount of capital that we have for growth.

So I would say that, absent the affects of the charitablecontribution in the fourth quarter on our operating ratio, we should see someimprovement in our operating ratio in the fourth quarter relative to the thirdquarter.

Even, I guess considering as we said in the call today, thatyou would naturally think that it might increase given the mix change that wehave experienced.

So we're going to keep our eye on it. As far as the othersegment goes, we have discontinued a number of initiatives, at leasttemporarily, maybe permanently, for which we hadn't made significantinvestments, but for which we were continuing to incur costs each quarter, sothere would be some modest reductions within the other income segment as well.

Carl Drake - SunTrust Robinson Humphrey

Okay. And I don't know if you would care to comment on 2008,given the reduction in managed earnings from the third quarter to fourthquarter, one might think take some time to ramp back up the marketing spend inthe first quarter.

So the first quarter level would be similar in terms oftrajectory that you are seeing in the fourth quarter, or is there some seasonalcredit deterioration that is implied in the fourth quarter, obviously beyondthe charitable contribution.

David Hanna

Yes, well I think, that someone earlier had alluded to. Iguess, it was David asking about the marketing spend and number of accounts andthe like. We because of the continuing testing and the like we're doing in themarket, and as well as the fact that we're still adding a lot of accounts rightnow, just not at the level of the second and third quarter, we believe we couldramp up marketing pretty quickly.

Could we do it overnight? No. But could we do it in six toeight weeks? Yes. So that is why it is hard to give you a number right now fornext year or the first quarter even, until such time as we have greater clarityon where we're going to be on marketing spend and the like.

Our hope is, and like I said earlier that we're going tohave some of those questions resolved at which point we will immediately crankback up. But it is one of we could have continued on the same marketing leveland looked out and said, okay, hopefully something is there next March, April,May. We made the determination that it was wiser long-term to pull back and let'slock in the funding for the foreseeable future before we crank up the market.

Carl Drake - SunTrust Robinson Humphrey

Yes, agreed. It makes sense. Thank you.

Operator

The next question comes from the line of Dennis Telzrow withCompuCredit (ph). Please proceed.

Dennis Telzrow - CompuCredit

That’s Stephens. Thank you, gentlemen. From what you aresaying, John Paul, that the current level of growth you could sustain, when yousay foreseeable future if nothing changed, is that a fair assumption?

J. Paul Whitehead

Yes. Exactly.

Dennis Telzrow - CompuCredit

Obviously next question is contingent on funding, but mypresumption is you would like to originate cards in the UK, if that wasavailable from a funding standpoint?

J. Paul Whitehead

Yes, in fact that is kind of embedded in the plans that wehave discussed with you guys today. We are close to beginning originationefforts in the UK.

We obviously, as we do everything here at CompuCredit, aregoing to start with doing the right amount of testing to make sure that we canget comfortable with the performance of the various vintages that we would beoriginating and with the IRRs that we would be earning on it before we reallystarted consuming a lot of capital in the UK on an origination effort. But thatis certainly baked in to the plans that we have for the fourth quarter andbeyond right now.

Dennis Telzrow - CompuCredit

I know it’s difficult, given all the issues, but lookinginto next year if nothing changed, with the loss rate on the lower end cardbegin to become more of a pressure point, or how should we look at that?

J. Paul Whitehead

I don't think it is the loss rate itself, I think it is morewhere the cards sit on the vintage curves. In the early months, as Davidmentioned before, early months of any particular vintage there are very fewcredit losses.

And when you get out to eight to nine months in our curvesyou hit the peak charge-off point. And then after that the accounts that are onthe books begin to cease and then charge-offs drop off significantly after thattime period.

Dennis Telzrow - CompuCredit

The big ads you added in the first two quarters would startto hit the half of next year on a loss basis, just on your vintage history?

J. Paul Whitehead

Yes.

David Hanna

I would say so. Yes.

Dennis Telzrow - CompuCredit

Okay. Thank you.

Operator

Your next question comes from line of John Hecht with JMPSecurities. Please proceeds.

John Hecht - JMP Securities

Good afternoon. Thanks for taking my questions. With respectto the neg AM changes, how should we account for that in terms of thinkingabout what that does to the net interest margin next quarter?

David Hanna

It will have likely some potential affect on our otherincome ratio potentially, or our net interest margin will be the likelycategories that you might see those effects.

John Hecht - JMP Securities

Can you give a sense for how much balance of neg AM wascreated this quarter to give a sense for what type of magnitude that would haveon the other income or net interest income margins?

J. Paul Whitehead

What I can do, we've got a disclosure in our 10-Q of thepercentage of receivables that are subject to or that are in a negative AMsituation both now and historically. If I can find that, I will give that doyou here.

John Hecht - JMP Securities

Okay. And then with respect to the discount in the Barclayspool you bought, can you give us a sense for how much of the discount you haveused with respect to charge-offs at this point?

J. Paul Whitehead

Before I go there, John, let me just give you the negativeam stats that you asked about. At September 30, approximately 3.2% of our accountsin the U.S., representing 5.4% of our receivables, were experiencing negativeam at December 31st, compared to 3.8% and 5.9% at December 31, 2006.

John Hecht - JMP Securities

Actually going back to it, what are you guys specificallydoing in terms of changing the billing associated with these neg am accounts orbalances?

Paul Whitehead

We will likely be providing some fee relief to someconsumers in certain categories of our fees to address the issue.

John Hecht - JMP Securities

And will you be allowing neg am across all accounts oraccount types going forward, or will there be changes to that going forward aswell?

J. Paul Whitehead

Really what we're contemplating in the fourth quarter and ithas been an ongoing effort relative to some of the FDIC reviews of our accountpractices and such is that we would be making changes in the fourth quarteraffecting really all of the accounts that we have for which there are alreadynegative amortization concerns or factors.

So, our best guess at this point is that we will be makingchanges in the fourth quarter, and that would be the completion of our effortto address negative am, the industry wide negative am issue.

John Hecht - JMP Securities

Fine. And then moving to the Barclays discounts, how much ofthat have you applied to charge-offs?

J. Paul Whitehead

I don't have that specific number in front of me, but youcan actually back into that by taking the difference between our net charge-offrate and our adjusted charge-off rate, and calculating that number from ourCredit Cards segment data that we have in our 10-Q.

John Hecht - JMP Securities

Okay. And I did take a stab at that back then, so it doesseem we are at a point where we should start seeing the variances between thenet adjusted start to decline at this point where you are the Barclaysportfolio?

J. Paul Whitehead

Yeah, in fact it declined this quarter relative to lastquarter. So, those two ratios, the net charge-off rate and the adjustedcharge-off rate, will begin to narrow again as they had done for many quartersprior to the UK portfolio acquisition.

John Hecht - JMP Securities

And then question, can you talk about some of the purchasesof the flow activity with respect to the investments in previously charged-offreceivables?

David Hanna

We're actually seeing pricing looks like it is getting morefavorable for purchasers of charge-off debts. Our Chapter 13 business continuesto perform well for us, and so we think that business is and this has occurredin previous, just like we think there are opportunities to buy performingportfolios or slightly distressed portfolios in this environment.

We also think that there are more opportunities to buycharge-off portfolios in this environment as well.

John Hecht - JMP Securities

Are you seeing pro-activity increase then at this point, orjust sort of waiting for it based on some of the trends you're seeing?

David Hanna

On the charge-off portfolios we haven't seen a lot ofincreased volume, but we have seen the pricing at more favorable levels.

John Hecht - JMP Securities

Okay. Thank you guys very much for the color.

Operator

Your next question comes from the line of Barry Cohen withKnott Partners. Please proceed.

Barry Cohen - Knott Partners

Yeah. Good evening guys, couple of questions. First, couldyou just -- since we have had a spot estimate out there, I have been trying towork with a piece of paper and pencil, and it is not been terribly easy for me.

Can you walk through like what gets you from the number thatpeople had originally to like what you guys are not talking about in the fourthquarter, so we can work through the pieces and say, okay, this is how much thisis, this is how much that is, and understand it a little better?

J. Paul Whitehead

We will give the color that we gave I guess there was reallythat we're looking at some changes to our negative amortization, to addressnegative amortization. We have had a decline in the trajectory of marketingadditions, account additions that would have generated a good bit of income inthe fourth quarter.

And then lastly we had the $6 million charitablecontribution, which was approved by the Board last Friday.

Barry Cohen - Knott Partners

No, I understand the categories, I understand thecategories, but I don't know the dollars to the categories. That is what I'masking for.

J. Paul Whitehead

Yeah. I really just don't have that data in front of meright now.

Barry Cohen - Knott Partners

Okay. Can you just remind us then, I know you guys talkedabout it last year when you started rolling out the lower tier product? Can youtalk about what basically, let's say your an average acquisition costs is androughly what on average the fee element of these accounts?

David Hanna

The acquisition to the marketing acquisition costs as…

Barry Cohen - Knott Partners

If you look at the two elements of it, which is kind of likethis is the cash that goes out the door over a period.

And if somebody signs up with us, this is the cash that iscoming in the door. So, we can understand that a little bit.

J. Paul Whitehead

I would say our account marketing costs have averaged probablyon a per account basis somewhere in the $50 an account, under $60 an accountrange for the card offering.

David Hanna

Let's see, we added $90 million, we added $1.5 million grossaccounts in the second and third quarter, and we spent a little over $90million. So that’s just what -- $60 an account.

Barry Cohen - Knott Partners

Thank you.

David Hanna

A little under $60 an account.

Barry Cohen - Knott Partners

And one, if I was to have one of these cards, I take the applicationand I put it in, and I get it, what typically is the upfront fee elementassociated with the card? I can't remember, I don't have my notes in front ofme.

J. Paul Whitehead

Yeah, the yield earned on the card consists of an APR plus,as is customary for other credit cards, an annual fee, a membership fee, thatis spread over 12-month period. So it’s – it’s not at all though the fees arerecognized on day one as they relate to that membership privilege period andare spread over the 12-month period.

David Hanna

The difference is, and the reason for the higherprofitability originally in the first six months is because you have zerolosses in the first six months, or close to zero losses in the first sixmonths. So while the fee is spread over -- the fees and APR, as J. Paul wassaying, are spread over the 12-months, you have zero losses in the first fewmonths. So that’s what elevates the profitability of those accounts during thefirst few months versus the whole year.

Barry Cohen - Knott Partners

Yeah, I understand. I'm not trying to be…

J. Paul Whitehead

And we have numerous different credit cards offers. Somehave some fees associated with them early; some have no fees associated withthem early. So this is not a set product to say, okay, this is 95% of ourbusiness and this is how it looks. There is -- 10 different products that aregoing out or more at different fee levels and different APRs and the like.

Barry Cohen - Knott Partners

I guess I'm just trying to think about it as we think -- Iwas just confused because I know last year with the charitable contributionthat created a little bit of a controversy, so I was surprised it was in yournumbers this year. So I'm just trying to work through if you cut marketing, ifyou have a, if your net dollar -- if your GAAP recognition of your marketingcosts is more upfront than your GAAP recognition of your fee income?

J. Paul Whitehead

Yes, it is.

David Hanna

Our GAAP recognition of marketing costs is day one.

Barry Cohen - Knott Partners

Right, so I’m just trying to -- since that’s droppingprecipitously, it has the inverse effect of what normally would take place whenit was growing, right? That’s just the way the math works. So, I'm just tryingto understand the dollar differential almost in terms of the expectations.

And so that’s just kind of where I am going in because itseems like you have got a number of different moving parts. You have gotoperating leverage. You've got new signup profitability. And you've got lowermarketing costs. You got changes in loss characteristics running through yourP&L, and so – and the charitable charge.

And so instead of having -- giving us numbers so we canunderstand it, so we can figure out how these variables will impact us nextyear, we are kind of left guessing. That is what I am trying to get from you. Iam trying to understand.

Work me through the math -- so you can work me through themath. I can say, okay, during the first quarter you decide to ramp up yourmarketing and you are doing 400,000 to 500,000 gross adds again, which is kindof what it would look like. Or if you can't do it, and you are doing 100,000 or200,000 gross adds this is what it kind of looks like. That’s what I trying toget at.

David Hanna

And that is -- our goal is to be able to provide you allwith information about 2008 once we have enough information to give you thatdata. And I get back to our working diligently on the liquidity front to enableus to come out and tell you, this is how many accounts we're hoping to add now,and this is how we think they will roll in the first quarter, second quarterand the like, so that you can get that level of data you're looking forward.

In terms of though, as we look from third quarter to fourthquarter, I think that, at least our expectation, is that we will have at least600,000 fewer customers in the fourth quarter than we would have had we notchanged our level of marketing. So that gives you a little bit of informationas to what we would have been looking at in terms of that many more accounts.

J. Paul Whitehead

On the revenue side of the equation.

David Hanna

Right, on the revenue side.

J. Paul Whitehead

So you have got the marketing piece, you've got thecharitable contribution piece and just -- you can back into the regular pieceof it.

Barry Cohen - Knott Partners

Thank you guys, I appreciate you all.

J. Paul Whitehead

Okay.

Operator

Thank you for your participation in today's conference. Thisconcludes your presentation. You may now disconnect. And have a good day.

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