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Executives

Jay Putnam - Director of Investor Relations

David Hanna - Chairman and Chief Executive Officer

J. Paul Whitehead - Chief Financial Officer

Analysts

Sameer Gokhale - KBW

Dan Fannon - Topy Credit

Moshe Orenbuch - Credit Suisse

David Hochstim - Bear Stearns

Carl Drake - SunTrust Robinson Humphrey

Dennis Telzrow - CompuCredit

John Hecht - JMP Securities

Barry Cohen - Knott Partners

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

Operator

Good day ladies and gentlemen, and welcome to the Third Quarter 2007 CompuCredit Earnings Conference Call. My name is Stacey and I will be your moderator for today (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

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

Jay Putnam

Thank you. Good afternoon and welcome to CompuCredit Corporation's third quarter 2007 earnings call. Before we get started I would like to remind you that some of our comments today will be forward-looking statements.

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

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

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 also may access our website to obtain a hardcopy of the press release and our financial statements, to view our risk factors or to listen to an archived version of this call.

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

David Hanna

Thanks Jay and thanks to you all for joining us today. Today we will review our performance during the quarter, update you on the current state of our business and share some thoughts about our outlook. J. Paul Whitehead, our CFO, will follow me to discuss the financial metrics for the quarter in greater detail.

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

The discrepancy between GAAP and managed earnings is principally due to the buildup of our allowances for loan losses attributable to the significant receivables growth we have experienced related to our high yielding, lower tier credit cards, our online and storefront Micro-Loans, and our 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 second quarter to 17.2% in the third quarter on the strength of the new account additions we have had this year. Our adjusted net charge-off rate climbed 100 basis points from 9.2% in the second quarter of 2007 to 10.2% in the third quarter.

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

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

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

However, similar to last quarter, dislocations in the mortgage and asset-backed securities markets led to a loss on investments that we previously made in asset-backed securities, a loss that depressed both our recorded after-tax, managed and GAAP results by $21.2 million or $0.43 per share.

Our remaining exposure to further loss on this investment is less than $12 million pretax, and we saw some stabilization in the value of these investments in September. Our Credit Cards segment achieved record account activations from our originated card offerings, adding over 500,000 net new accounts during the quarter.

We added an average of 750,000 gross new accounts per quarter in the second and third quarters of this year as we ramped our direct mail, telemarketing and Internet campaigns to new levels to the large population of financially underserved consumers.

While we believe that the current environment supports account additions that are at or near the levels we added in the second and third quarters, the disruption that we have seen in the global liquidity markets caused us to pull back our marketing efforts in mid to late August.

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

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

We have seen other specialty finance companies make assumptions about future funding only then to be surprised. Our approach is more conservative, in that we try and have our funding lined up for 18 to 24 months in the future on a rolling basis. We will increase or decrease our marketing efforts based on both what the customer appetite is as well as what our 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 us to take advantage of great opportunities in the market, and we are hopeful that we will be able to obtain additional growth capital under acceptable pricing and terms during the fourth quarter of this year.

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

Our past experiences also lead us to believe that we can obtain the additional liquidity necessary to take advantage of further credit card portfolio acquisitions. There seems to be a fair bit of activity out there right now as a variety of financial institutions are focused on shoring up their mortgage and other product operations.

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

Purchasing portfolios has been a very successful venture for us in the past, largely due to the expertise we bring to the table in account management and collections, and we are well positioned to do additional credit card portfolio acquisitions in the U.S. and in the U.K. We will continue to stress diligent underwriting philosophies and expense efficiency initiatives to deliver sound financial results for our credit cards segment and take advantage of opportunities as they present themselves.

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

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

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

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

Nevertheless, we feel good about the potential for our Auto Finance segment businesses. ACC just completed a $200 million financing facility 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 expectations for this business.

Now let me move on to our Retail Micro-Loans segment, which posted its fifth straight quarter of positive GAAP income in the third quarter. Gross revenues increased 16% over last year's third quarter, as our multi product line strategy continues to produce promising results in both our new domestic and U.K. storefronts, and raises our expectations of increased profitability 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 in third quarter net income compared to the third quarter of last year. We also experienced increased charge-offs and an increase in our allowance for uncollectible loans and fees in this year's third quarter; consistent with trends we have seen across the industry.

Continuing our segment discussion, our Investments in previously charged-off receivables subsidiaries posted another quarter of solid financial results, raising its third quarter pretax GAAP income 20.5% from last year's third quarter.

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

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

Based on third quarter changes in the global liquidity environment, we have discontinued at least temporarily if not permanently, some of our Other segment's new product development activities, including our underwriting, servicing, collecting and investing in assets secured, consumer financed receivables, such as loans secured by motorcycles, all-terrain vehicles, personal watercraft and the like, and our testing of an online mall of consumer electronics and other products for which we would have provided the underlying consumer financing.

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

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

The highly publicized problems in the sub-prime mortgage lending business data and the related secondary markets created significant dislocation in the global liquidity markets beginning in mid-August this summer.

While these problems appear to reflect problems distinctly related to the subprime mortgage industry, investors in that industry also are investors in other subprime asset classes. And one repercussion from the problems in the subprime mortgage industry has been reluctance, albeit temporarily, by many investors to invest in other subprime asset classes, at least at the levels at which, and with the terms under which, they previously invested.

We have acted swiftly and decisively in lowering our marketing investments to conserve our liquidity to protect against a prolonged or worsening dislocation in the liquidity markets. Although we are confident the 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 of liquidity out there that is looking for a decent return. And we also envision a scenario under which the subprime mortgage pull back may actually support greater investor liquidity allocations to other asset classes like credit cards.

We also believe we are already seeing another positive aspect of the current liquidity environment for our business. We have seen a pull back in marketing efforts among some of our competitors, who are dealing with their own subprime mortgage problems, thereby creating marketing opportunities for us, assuming that we have the right liquidity.

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

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

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

J. Paul Whitehead

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

Trends into our key managed statistical measures included a decline 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 third quarter; an increase in our other income ratio to 17.2% for the third quarter of 2007 compared to 12.3% in the second quarter of 2007, and 15.7% from last year's third quarter.

An increase in our adjusted charge-off rate to 10.2% for the third 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 day delinquencies to 14.6% as of September 30, 2007 compared to 13.2% as of June 30, 2007, and 14% as of September 30, 2006.

Our modest decline in net interest margin between the second and third quarters of this year principally reflects a third quarter reclassification of our MEM subsidiary's revenues from our net interest margin to our other operating income category to align MEM's revenue classification with that of our domestic Retail Micro-Loan operations.

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

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

We see this inefficiency as being only temporary as we expect to deploy these excess draw funds to grow our receivables base over the coming weeks and months. We should also note that our April 2007 UK portfolio acquisition has significantly muted our net interest margin, as well as our other income ratio, relative to our prior year third quarter ratios, for example.

While ratios associated with the UK portfolio are performing as expected, the yields associated with these card offerings are much lower than those of our originated accounts underlying our lower tier receivables. As the UK portfolio receivables continue to liquidate over time, the receivables associated with our lower tier originated accounts continue to grow; we expect that these ratios will continue to grow.

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

Most of the revenues generated from these cards flow through our other income category. Considering that our other income ratio also includes the effects of realized and unrealized losses on our portfolio of ABS bonds, which were greater in the third quarter than in the second quarter of this year, we were pleased with a jump in our other income ratio.

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

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

Our purchase price discount on this portfolio is used to offset 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-offs and adjusted charge-offs converge as the impact of purchased discounts diminishes.

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

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

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

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

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

David also noted that recent marking of our lower tier credit card offerings at historically high levels generated an average of 750,000 gross account additions during each of the second and third quarters of 2007, along with significant growth in new receivables that have not yet seasoned 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 to produce between 150,000 and 200,000 gross account addition per quarter, is expected to cause rising delinquencies as the unusually large vintages of second and third quarter 2000 receivables season through delinquency categories and on to peak charge-offs levels by a 8 to 9 months after card activation.

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

The most significant of these factors is probably the unprecedented growth in our lower tier receivables, which has resulted in our increasing allowances for un-collectible loans and fees receivable quite considerably, thereby resulting in significant provisions for loan losses in our income statements.

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

But have yields and generate IRRs that also are well in excess of those receivables held by other credit card issuers. GAAP accounting is unfortunately a one-way street, and than in our case, that it produces net asset values significantly below the economic value of our assets, as the unusually large I/O strip values on our lower tier receivables are excluded from their GAAP values.

Turning now to some of our expense items, which are the same under 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 million expense as we pulled back our marketing levels in August.

We remained pleased with our response in card activation rates and competitive landscape. And as David said, we have a marketing plan targeting 150,00 to 200,000 of gross activated account additions per quarter that takes us out into the foreseeable future with no need for additional funding.

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

During the quarter we continued to investigate areas for improving our efficiency and servicing our accounts and to adjust our initiatives and corresponding resource levels to fit some of our scaled down efforts in the current liquidity environment.

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

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

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

Recapping our liquidity picture moving into the fourth quarter, we had approximately $270 million of available liquidity at the end of the third quarter. This available liquidity is represented by unrestricted cash balances, draw potential against our cap collateral base within our originated portfolio master trust, and draw potential against our collateral base supported by our structured financing facilities, secured by our lower tier credit card receivables.

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

We expect our available liquidity to be sufficient to fund our operating funding needs for the foreseeable future. We also are pursuing a number of new financing facilities and liquidity sources that will support more aggressive marketing levels and opportunities that we believe are attractive in the current environment.

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

And while our third quarter results were very much in line with our expectations, we are adjusting our fourth quarter managed earnings estimates principally based on the effects of our decision in August to curtail our growth and conserve capital given uncertainties in the Capital Markets, further account management actions we plan to undertake in the fourth quarter to address negative amortization and our Board of Directors' decision in its meeting last Friday to approve a $6 million charitable contribution under our 2007 shareholder designation plan.

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

Let me conclude now by thanking you all on behalf of both David and me for your interest in CompuCredit and your participation in our third quarter earnings call. With that, we would be happy to entertain questions at this time.

Question-and-Answer Session

Operator

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

Please proceed.

Sameer Gokhale - KBW

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

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

J. Paul Whitehead

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

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

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

Sameer Gokhale - KBW

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

Where does it stand? What are they looking at this point? I think it’s been a year and a half since they have been in there now. So, can you 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 has completed an exhaustive review of our entire business and practices as they pertain to our relationship with CB&T or with other banks. And as our expectations have been for some time, we expect that we will resolve any questions and come to a resolution with the FDIC, hopefully in the near term.

But with the federal government on the other side, we don't get to set the time line; they have a lot more ability to do so. But we think that 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 given guidance for Q4 of $0.80 to $0.90, and in there was a $6 million charitable contribution. I think that works out to roughly about $0.08 or so a share. But the rest of it I think you said was partly because of curtailing new account originations.

It just seems like a pretty big drop in expected earnings just 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 credit dynamic? Or how should we think about this, because going from your run rate for this quarter down to the $0.80 to $0.90 seems like a relatively big drop sequentially?

David Hanna

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

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

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

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

Sameer Gokhale - KBW

Okay. Thank you.

Operator

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

Dan Fannon - Topy Credit

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

J. Paul Whitehead

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

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

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

The deal that we just closed last week, it was an amendment to our first facility that is supported by our lower tier credit card receivables. 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 lender in a deal that has not been syndicated to outside parties.

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

That particular facility has been extended to March 2009. It otherwise would have expired in March of 2008. So, towards your question of whether there are any significant re-financings that we need to undertake or extensions, there really are not at this time. We will get into what we think will be our normal course extension of our BoA conduit in September of next year.

And as we mentioned in the call, we think we got all the boxes 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 the scenario of a more healthy kind of liquidity environment about potential purchasing of receivables.

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

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

David Hanna

Well, I think that your first question about purchasing portfolios, we believe that and over our history even during very tight credit markets back in 2001 timeframe and things like that, we have always been able to finance portfolio purchases under terms that we found to be pretty attractive.

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

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

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

Dan Fannon - Topy Credit

Okay, Thank you.

Operator

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

Moshe Orenbuch - Credit Suisse

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

David Hanna

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

Moshe Orenbuch - Credit Suisse

On a separate issue, could you talk a little bit about, you have already talked about it just in response to the last question a little about portfolio acquisitions? What actually has been out there? Is there any way you can characterize the mindset of any of the players? And who is looking in 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 consumer market, has been the time when people look to potentially sell portfolios.

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

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 credit tightening and consumer concerns has been where portfolio trades happened. And that is why we believe that there is a reasonable chance we will see some of that going forward.

Moshe Orenbuch - Credit Suisse

Just to get back, sorry to jump around like this, but to get back 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 in there 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 weaker earnings. 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 else in there and I would be missing?

David Hanna

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

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

Moshe Orenbuch - Credit Suisse

Okay.

J. Paul Whitehead

I would also verify versus that with the ramp up in marketing and the trajectory that we were on based on second and third quarter marketing spend and marketing levels, you would have seen that trend increase and continue in the fourth quarter and there would have been even more account additions in the fourth quarter likely than in the second and the third, based on the path that we were on, which obviously given David's point, would have created 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 Hochstim with Bear Stearns. Please proceed.

David Hochstim - Bear Stearns

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

J. Paul Whitehead

I think at the levels that we're talking about from a marketing perspective, we will likely see fairly modest account growth in the fourth 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 there still be net account growth at the same level of originations, gross originations or it would sort of runoff?

David Hanna

Once again, our hope and our expectation is that we're going to 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, if you're planning out over 18 months, wouldn't you?

David Hanna

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

David Hochstim - Bear Stearns

Okay. And could you just repeat what you said about the current level of mortgage-related investments and where the market was at the end of September 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't follow it all on the mortgage-related investments, how much was left at September 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. And that is included within the other income ratio. And without those losses in the other income ratio, we would have, our other income ratio would have been 20.9%.

And without those losses we would have been at about $1.38 of 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 or carrying 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 based on the information we have today.

David Hochstim - Bear Stearns

Okay. And how much of the losses are unrealized losses that in 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 get that 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 with SunTrust Robinson Humphrey. Please proceed.

Carl Drake - SunTrust Robinson Humphrey

Thank you. Good afternoon. A couple of questions on the liquidity, J. Paul, are any of the liquidity constraints perhaps impacting your mix 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 prime financing?

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 lower 150,000 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 of our total marketing, it’s relatively comparable to what it was when we were marketing at the higher level, between the near prime and the lower tier account 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 our lower tier product offering, and you can quickly get to the conclusion, if you look at that versus our total managed receivables levels within the Credit Cards 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 a lot of focus on efficiencies. You mentioned suspending some research and development. Maybe you could elaborate on the dollar amount of savings that we might 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 do you already have significant, maybe you can provide some color on the dollar amount of expense savings?

J. Paul Whitehead

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

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

So I would say that, absent the affects of the charitable contribution in the fourth quarter on our operating ratio, we should see some improvement in our operating ratio in the fourth quarter relative to the third quarter.

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

So we're going to keep our eye on it. As far as the other segment goes, we have discontinued a number of initiatives, at least temporarily, maybe permanently, for which we hadn't made significant investments, but for which we were continuing to incur costs each quarter, so there 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 fourth quarter, one might think take some time to ramp back up the marketing spend in the first quarter.

So the first quarter level would be similar in terms of trajectory that you are seeing in the fourth quarter, or is there some seasonal credit deterioration that is implied in the fourth quarter, obviously beyond the charitable contribution.

David Hanna

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

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

Our hope is, and like I said earlier that we're going to have some of those questions resolved at which point we will immediately crank back up. But it is one of we could have continued on the same marketing level and 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's lock 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 with CompuCredit (ph). Please proceed.

Dennis Telzrow - CompuCredit

That’s Stephens. Thank you, gentlemen. From what you are saying, John Paul, that the current level of growth you could sustain, when you say 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 my presumption is you would like to originate cards in the UK, if that was available from a funding standpoint?

J. Paul Whitehead

Yes, in fact that is kind of embedded in the plans that we have discussed with you guys today. We are close to beginning origination efforts in the UK.

We obviously, as we do everything here at CompuCredit, are going to start with doing the right amount of testing to make sure that we can get comfortable with the performance of the various vintages that we would be originating and with the IRRs that we would be earning on it before we really started consuming a lot of capital in the UK on an origination effort. But that is certainly baked in to the plans that we have for the fourth quarter and beyond right now.

Dennis Telzrow - CompuCredit

I know it’s difficult, given all the issues, but looking into next year if nothing changed, with the loss rate on the lower end card begin 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 more where the cards sit on the vintage curves. In the early months, as David mentioned before, early months of any particular vintage there are very few credit losses.

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

Dennis Telzrow - CompuCredit

The big ads you added in the first two quarters would start to 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 JMP Securities. Please proceeds.

John Hecht - JMP Securities

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

David Hanna

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

John Hecht - JMP Securities

Can you give a sense for how much balance of neg AM was created this quarter to give a sense for what type of magnitude that would have on 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 the percentage of receivables that are subject to or that are in a negative AM situation both now and historically. If I can find that, I will give that do you here.

John Hecht - JMP Securities

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

J. Paul Whitehead

Before I go there, John, let me just give you the negative am stats that you asked about. At September 30, approximately 3.2% of our accounts in the U.S., representing 5.4% of our receivables, were experiencing negative am 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 specifically doing in terms of changing the billing associated with these neg am accounts or balances?

Paul Whitehead

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

John Hecht - JMP Securities

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

J. Paul Whitehead

Really what we're contemplating in the fourth quarter and it has been an ongoing effort relative to some of the FDIC reviews of our account practices and such is that we would be making changes in the fourth quarter affecting really all of the accounts that we have for which there are already negative amortization concerns or factors.

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

John Hecht - JMP Securities

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

J. Paul Whitehead

I don't have that specific number in front of me, but you can actually back into that by taking the difference between our net charge-off rate and our adjusted charge-off rate, and calculating that number from our Credit 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 does seem we are at a point where we should start seeing the variances between the net adjusted start to decline at this point where you are the Barclays portfolio?

J. Paul Whitehead

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

John Hecht - JMP Securities

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

David Hanna

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

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

John Hecht - JMP Securities

Are you seeing pro-activity increase then at this point, or just 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 of increased 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 with Knott Partners. Please proceed.

Barry Cohen - Knott Partners

Yeah. Good evening guys, couple of questions. First, could you just -- since we have had a spot estimate out there, I have been trying to work 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 that people had originally to like what you guys are not talking about in the fourth quarter, so we can work through the pieces and say, okay, this is how much this is, 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 really that we're looking at some changes to our negative amortization, to address negative amortization. We have had a decline in the trajectory of marketing additions, account additions that would have generated a good bit of income in the fourth quarter.

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

Barry Cohen - Knott Partners

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

J. Paul Whitehead

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

Barry Cohen - Knott Partners

Okay. Can you just remind us then, I know you guys talked about it last year when you started rolling out the lower tier product? Can you talk about what basically, let's say your an average acquisition costs is and roughly 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 like this is the cash that goes out the door over a period.

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

J. Paul Whitehead

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

David Hanna

Let's see, we added $90 million, we added $1.5 million gross accounts in the second and third quarter, and we spent a little over $90 million. 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 application and I put it in, and I get it, what typically is the upfront fee element associated with the card? I can't remember, I don't have my notes in front of me.

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, that is spread over 12-month period. So it’s – it’s not at all though the fees are recognized on day one as they relate to that membership privilege period and are spread over the 12-month period.

David Hanna

The difference is, and the reason for the higher profitability originally in the first six months is because you have zero losses in the first six months, or close to zero losses in the first six months. So while the fee is spread over -- the fees and APR, as J. Paul was saying, are spread over the 12-months, you have zero losses in the first few months. So that’s what elevates the profitability of those accounts during the first 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. Some have some fees associated with them early; some have no fees associated with them early. So this is not a set product to say, okay, this is 95% of our business and this is how it looks. There is -- 10 different products that are going 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 -- I was just confused because I know last year with the charitable contribution that created a little bit of a controversy, so I was surprised it was in your numbers this year. So I'm just trying to work through if you cut marketing, if you have a, if your net dollar -- if your GAAP recognition of your marketing costs 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 dropping precipitously, it has the inverse effect of what normally would take place when it was growing, right? That’s just the way the math works. So, I'm just trying to understand the dollar differential almost in terms of the expectations.

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

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

Work me through the math -- so you can work me through the math. I can say, okay, during the first quarter you decide to ramp up your marketing and you are doing 400,000 to 500,000 gross adds again, which is kind of what it would look like. Or if you can't do it, and you are doing 100,000 or 200,000 gross adds this is what it kind of looks like. That’s what I trying to get at.

David Hanna

And that is -- our goal is to be able to provide you all with information about 2008 once we have enough information to give you that data. And I get back to our working diligently on the liquidity front to enable us 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 quarter and 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 fourth quarter, I think that, at least our expectation, is that we will have at least 600,000 fewer customers in the fourth quarter than we would have had we not changed our level of marketing. So that gives you a little bit of information as 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 the charitable contribution piece and just -- you can back into the regular piece of 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. This concludes your presentation. You may now disconnect. And have a good day.

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Source: CompuCredit Corp. Q3 2007 Earnings Call Transcript
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