Atlanticus Holdings Corp (ATLC) 2002 Q3 法說會逐字稿

Please stand by. We are about to begin. Good day and welcome to the CompuCredit corporation third quarter, 2002 earnings conference call. Today's call is being recorded. At this time, I would like to turn the call over to the Director of Investor Relations, Ms. Nancy King. Please go ahead.

Good morning, thank you for joining us for CompuCredit Corporation's conference call to discuss the 2002 third quarter earnings release. My name is Nancy King and I am the Director of Investor Relations. Before we get started, I would like to remind you that today we will be making some forward-looking statements. These forward-looking statements may include any statements of our plans, beliefs or expectations of future results or development including our future profitability, possible portfolio acquisitions and anticipated future growth and charge off rates. Our actual results may differ materially from the plans or expectations reflected in those statements. You should read the risk factor sector of our report on form 10K for the year ended December 31, 2001 for a summary of some of the more important factors that may cause actual results to differ from the results reflected in the forward looking statements that we make today.

Thank you again for your interest in CompuCredit. Please feel free to contact me if you ever have any questions you wish to discuss. You may also access our web website www.compucredit.com in order to obtain a hard copy of the press release, our financial statements or to listen to an archived version of this conference call. With that, I will turn it over to David Hanna to give you an overview of CompuCredit's performance in the third quarter of 2002.

Thank you, Nancy, and thank you, all, for participating in this, our third quarter 2002 earnings conference call. Joining me on the call today are Rich House, our president, as well as J. Paul Whitehouse, our CFO. I'll give you a brief overview of our business, J. Paul will then go over the financial highlights and Rich will provide you with some detail concerning our operational and portfolio performance during the second quarter as well as or outlook for the future. After our prepared remarks, we will be happy to answer any questions you may have.

We are pleased to report earnings for the third quarter of $21 million or 43 cents per share. After struggling for profit profitability over the last few quarters, we are very pleased that we're on the right track. During a continuing weak economy and difficult regulatory environment, we are happy with the results for the third quarter. The third quarter was a very busy quarter for CompuCredit. During the quarter, we successfully expanded our operations to service the Providian and Fingerhut portfolios. We have converted the Providian business to our platform of total systems.

We brought on some key new executives to help us build our business in the future. J. Paul Whitehead, who joined our company officially on October 16th, has hit the ground running and we very pleased to have him on board. David Burton was hired to manage our Fingerhut portfolio. David has a great deal of experience in the collection area that is helpful for this portfolio that has a large liquidating portion.

We also signed a new extension of our agreement with Total Systems and CB and T, our servicing and banking partner, that extends those agreements out until March 2006. We had a very fruitful relationship with Total and CB and T, and we are happy that we are able to extend those agreements.

As you heard us say during our last conference call, the environment for credit card issuers and our market has become more difficult during 2002 than at any time during the last 10 years. Like everyone, we are hopeful that we see an improvement in the economy. We think that this could have a big impact on improving our bottom line profits. That being said, we are very confident that we can continue to sustain healthy profitability even during this negative economic environment.

We were going to give you some of our thoughts on strategy moving forward but we decided to expand this discussion by having an investor meeting in New York City on December 12th. There have been so many changes in the industry that we think it makes more sense to spend a few hours discussing our plans for the future. This meeting will be simultaneously web cast so that those who can't attend can still participation. At this meeting, we will outline in some detail the opportunities that we see and our plans and projections moving forward to take advantage of these opportunities.

We have also taken a look at many of the corporate governance and disclosure issues that have been brought to the forefront during the last several months. It is our belief that the better people understand CompuCredit, the more comfort they will have in the stock. Along those lines, we have expanded some of our disclosures in our 10Q that will break out some of our statistical performance metrics by portfolio. We also intend to begin publicly disclosing our monthly trust certificates for two-term deals within the master trust beginning in January. We think these steps will help investors to get a better picture of CompuCredit. We believe that these disclosures will give investors additional information without compromising our competitive or proprietary information.

Last quarter, we indicated that we had authorized a stock repurchase program. Through the end of the third quarter, we had purchased 500,000 shares of treasury stock. Subsequent to the end of the quarter, we purchased an additional 300,000 shares. CompuCredit is producing more cash flow than at any time in its history, so we will look to continue our buying program during the fourth quarter. We also think that it is prudent to ensure that we have cash reserves that will allow us to take advantage of some portfolio acquisitions that might be available. In summary, we are pleased with the quarter from a profitability standpoint, an operational standpoint and an opportunity standpoint. We undertook some significant operational issues during the last several months and we were able to accomplish them with very few hiccups. We continue to see opportunities to purchase other portfolios, and we think this will continue for some time. Finally, our originated portfolio continues to season and mature, showing the type of results that we expected. We are cautiously optimistic that conditions will be favorable such that we can rapidly grow our originated business again in 2003.

Now I would like to turn it over to J. Paul Whitehead so he can go over the financial results.

Thank you. Let me begin by giving a few highlights for the third quarter before Rich and I drill down into some details concerning our financial performance during the quarter. First of all CompuCredit reported gap net income attributable to common shareholders of $21 million during the third quarter, which represented income for common share on a fully diluted basis of 43 cents per share. Included in these results is the performance of the Fingerhut portfolio since of date of its acquisition on July 12th as well as a full quarter's performance of our 50% share of the Providian receivables that were acquired during the second quarter by our joint venture LLC with Goldman Sachs and Salomon Smith Barney. Now taking into account the current quarter results, the book value of the company on a gap basis for fully diluted common share now stands at $8.50 per share, versus $8.06 per share as of June 30, 2002.

On a managed basis, we posted third quarter net earnings attributable to common shareholders of $43 million or 86 cents per share as computed on a fully diluted basis. Not only have our two portfolio acquisitions contributed to strong gap and managed earnings but they have also contributed to strong cash flows during the third quarter as indicated by David. These cash flows have enabled us to repay significant amounts of acquisition related debt as well as increase our cash balances to $60.6 million as of September 30, 2002, up from 27.8 million as of June 30, 2002.

Including our 50% share of the Providian receivables, our total managed receivables rose to 3.03 billion as of September 30 from 2.26 billion June 30. This reflects the addition of the Fingerhut receivables. As we explained in prior conference calls, we have chosen to focus most of our resources and capital on acquisition opportunities as a means to increase our managed receivables base because we believe the current market environment allows us to allow greater returns on purchased receivables than the returns that we can now earn on receivables originated organically within our business. We've also found liquidity markets to be more favorably disposed to our acquisition activities that be than to the organic origination activities. While we continue to originate new receivables and test markets we have slowed down our marketing within our originated business by design to allow us to purchase and integrate the purchase portfolios into our operations.

During the third quarter, we did originate 72,000 accounts organically within our business at a gross $61 cost per account. Also during the third quarter, our net interest margin earned on our managed receivables was 21.4%, as compared to 13.1% during the second quarter.

Additionally, the adjusted charge-off rate or the economic charge-off rate as we have used that term in prior conference calls, was 8.3% versus 15% in the second quarter. Both of these favorable comparisons to the second quarter can be attributed principally to the fact that when we acquire a portfolio, like our Fingerhut portfolio, our presented credit card data excludes acquired receivables and related accounts which at the time of the purchase were either closed or at a late delinquency status. These accounts are in the process of being charged off by the seller due to delinquency or were likely to be charged off by the seller in the near term. Effectively, because of the exclusion of these acquired receivables from our credit card statistics, for the first several months after any particular acquisition, there are fewer finance charge charge-offs as an offset in our computation of net interest margin and fewer principle charge-offs to enter in our adjusted charge-off rate computation.

Additionally, our adjusted charge-off rates after a portfolio acquisition are further depressed because of the portion of a discount inherent within the purchase price of our acquired portfolios relates to credit quality of the acquired receivables and because net charge-offs in post-acquisition buyouts are reduced by a portion of the credit quality discount that is allocable to such charge-offs. During the months that follow an acquisition and with the aging of receivables underlying accounts that were not closed or in a late delinquency status as of the acquisition date, the level of finance charge charge-offs and principle charge-offs gets more normalized with each passing month. Essentially another way of looking at this is that is the impact of portfolio purchases on our net interest margin and adjusted charge operate is similar to adding a large amount of new receivables. The denominator used in the calculation of both the net interest margin and the adjusted charge-off rates increases significantly while there are very few finance charge and principal charge-offs in the numerator of each respective ratio for some number of months immediately following the portfolio purchases. The effect of this increase in receivables increases the net interest margin and depresses the adjusted charge-off rate for a period of time. However, as the portfolio ages after the acquisition date, additional finance charges and principle balances begin to fall into the 180-day charge-off category, thereby causing the net interest margin to fall back into and settle at its long-term equilibrium and the adjusted charge-off rate to rise and then settle at its long-term equilibrium. Now let me turn things over to Rich who will provide further color on our portfolio performance during the third quarter.

Thank you, J. Paul. I'll provide overviews of each of our portfolios, discuss liquidity and outline our strategy moving forth. Our economic charge-off rate was 8.3% in the second quarter this represents a combination of our core portfolio and our purchase portfolios. As David said earlier, we'll be providing master trust data on a monthly basis in the future. And later on I will outline performance on our core originating portfolio. As J. Paul discussed, discount rate applied to distressed portfolio significantly impacts the corporate charge-off rate immediately after purchase. Our methodology for calculating charge-off rate of a purchase portfolio is described completely in our 10Q that will be filed tomorrow. The methodology is described in the section titled “Selective Credit Card Date.”

Our corporate delinquency rate rose from 9% in the second quarter to 12.3% in the third quarter. This is attributable to three reasons. First, the delinquency rate in the second quarter was artificially low due to closing the Providian purchase so late in the quarter. As J. Paul just explained, we exclude acquired receivables which are in a late delinquency status. Therefore, in June, when we completed the Providian purchase, there were far fewer reported delinquencies than there will be in a steady state. Secondly, the Providian and Fingerhut portfolios are now seasoning and filling out their later stage delinquency budgets. Finally, and least importantly, the delinquency rate rose in the core originated portfolio. I will discuss that in detail later. We anticipate corporate delinquencies to rise over the next two quarters based on the seasoning of the Providian and Fingerhut portfolios. In spite of this, we expect originated delinquencies to diminish. Later I will provide corporate charge-off guidance including the Providian and Fingerhut portfolios.

However, I first want to provide some detailed insight into our originated portfolio. Our core originated portfolio represented in our master trust performed generally as expected with respect to charge-offs in the quarter. However, purchase volume was lower than expected and payments remained strong. As a result, the average receivable shrank 1.2% during a period in which we typically anticipate receivables growth. Our purchase volume was below our projections and well below last year's purchase volume. We suspect the slower economy is negatively impacting purchases. However, we are willingly patient to wait for volumes to return and we will not increase our credit line exposure.

Master trust charge-offs were 15.7% for the quarter, down from 16.7% in the second quarter and in line with our projections. Let me take a moment to clarify master trust reporting versus the financial reporting used by credit card companies. In master trust reporting, the charge-off rate is calculated as the principle charge-off dollars divided by the principle receivables, whereas traditionally in financial reporting, the charge-off on rate is defined as principle charge-off dollars divided by total receivables, the effect is that the charge-off rate is always higher in master trust reporting because the denominator is smaller. Since the principle receivables definitionally are a subset of total receivables. As an example, our master trust charge-off rate of 15.7% would have been 14.5% in traditional financial reporting. Similarly, yield for -- are calculated the same way. Therefore master trust yields are higher than would be reported traditionally. There is no economic impact of calculating yields and charge-offs one way or the other. However, we felt this explanation would minimize investor confusion when we begin officially reporting master trust data publicly.

Our 30-plus delinquency rate for the core portfolio increased 80 basis points to 15.7% in the third quarter. Some of this was expected due to seasonal factors common in the third quarter. Some of the increase in the rate was due to a lower denominator than we originally anticipated and some is probably due to a weak economy. Fortunately, we are now seeing a reduction in our early delinquency buckets and expect them to decrease for the originating portfolio in the fourth quarter.

As a result of the delinquencies being up, we anticipate the charge-off rate for the core portfolio to be between 15.5 and 16.5% in the master trust for the fourth quarter. Notably, this is lower than the second quarter and improving as we move forward. We are confident our charge-offs for the core originated business peaked in the second quarter and will diminish further in 2003. This is consistent with the vintage analysis I have shared with you in the past.

As an update, our 1999 and 2000 2000 vintages continue to perform as expected and currently the weighted age of the receivables in our master trust is 29 months. The three month average excess spread in the master trust at the end of September was 9.5% We expect the excess spread to diminish some in the fourth quarter as a result of the higher charge-off I discussed earlier and payment rates that are see seasonably low in November and December. However, we expect the excess spread to remain robust and to be above 8%. That concludes my review of the originated portfolio.

Now I'll provide an update of the Providian transaction. As a reminder, we purchased approximately $1.2 billion in distressed assets from Providian, representing approximately 766,000 accounts. As you know, the purchase was completed through an LLC with Goldman Sachs and Salomon Smith Barne y. We are servicing all of the assets and we own approximately 50% of the economics of the LLC. In the third quarter, our priority was overseeing the interim servicing provided by Providian preparing for the conversion of the portfolio to our system and building sufficient operational resources to handle collections and customer service. I'm happy to report we completed the conversion to our total systems platform on schedule October 15th. We also simultaneously opened a separate collection site in Salt Lake City, Utah and increased our existing capacity in North Wilkesboro, North Carolina. With the addition of these sites and select outsourcing, we are comfortable with our collections capacity for the Providian portfolio. In the third quarter, the portfolio performed somewhat better than our estimates and contributed to managed income being higher than we anticipated in the quarter.

The Fingerhut transaction was completed in July. In this transaction, we purchased a private label portfolio from Federated Department Stores totaling approximately 1.1 billion in assets and representing about 2.5 million accounts. Associated with the transaction, we were able to hire over 800 employees in Minnesota residing in existing Fingerhut facilities. We've continued to process the portfolio on the Federated credit platform which eliminated the need for a system conversion. Therefore, we've been able to immediately focus on intensifying our collection effort.

As David mentioned earlier, we hired David Burton, an experienced collection executive, to lead our operational efforts in Minnesota. The initial performance of the portfolio has been better than we expected and contributed to managed income being higher than we expected for the quarter. Combining all portfolios and looking forward, we anticipate economic charge-off rates to remain below 12% in the fourth quarter and throughout 2003.

I will briefly comment on our view of the liquidity market. The liquidity market remains robust for purchasing distressed assets. We are continuously reviewing portfolio acquisitions and have identified several liquidity partners who are willing to pursue these opportunities with us. This includes both asset backed liquidity as well as equity or mezzanine liquidity. We remain confident we can pursue multiple distress asset purchases simultaneously with the appropriate liquidity. Since the summer, we've also been successful at securing the appropriate asset backed liquidity for our originated business. In July, we closed a facility with a new provider for $300 million and in October, we renewed another $300 million facility. We currently have approximately $2 billion in securitization facilities for our originated business and we are using approximately $1.6 billion currently of our facilities. Earlier, I mentioned we continue to have robust excess spreads in our master trust and we are comfortable with our current bank partners. Finally, with respect to liquidity, we are pleased to see our cash reserves increase in the third quarter.

Now I'll outline our strategy moving forward. In the past few months, some of our competitors have announced they will be slowing their growth in the sub-prime market. Even those who are staying in the market have indicated a desire to move up the FICO score range. This should result in less competition and more room for growth and increased profitability in our core market. Indeed, our new account testing in the third quarter indicated response rates are improving. These market conditions combined with the liquidity, credit quality improvements and excess spreads I discussed earlier suggest this is a good time to resume growing our originated portfolio. We are confident all of the pieces are in place and we can immediately begin profitably growing our originated portfolio.

But we are going to proceed cautiously over the next several months and continue to focus on portfolio acquisitions. As a management team and shareholders, we are focused on maximizing our returns on capital. In our originated business, we target around 3% after-tax return on asset. This creates a return on equity of 20 to 25%, given the current leverage ratios in the asset-backed securitization market. While this is a healthy and acceptable return, it is far lower than the returns we create when we purchase distressed assets. That is because our experience at managing distressed assets coupled with robust liquidity enables us to create a superior return on capital. Both the return on assets and return on equity are higher when purchasing distressed assets than when originating assets. We believe that the supply of distressed assets for sale will continue to remain high over the next six months based on general economic trends, regulatory attitudes, and the portfolio specific performances we are observing in the nonprime market.

Frankly, as long as we believe these are available for purchase, it would be irrational for us to use our capital originating new accounts. Having said that, we are pleased with the trends in our originating business and We believe there will be plenty of opportunity to profitably increase our originations in 2003. Currently, we anticipate accelerating new account growth in the first half of the year. However, if market conditions indicate there are portfolios to buy, we will continue to focus on purchasing distressed assets in 2003. We believe the combination of our ability to profitably originate accounts and to successfully purchase distressed portfolios provides us with diverse earnings which will enable us to do well in 2003 even if the economy does not improve. I'll turn it back to David now.

Thank you, Rich. Now we'd like to open the call up for questions.

Thank you. If you would like to ask a question, we'd ask that you respond by pressing the star key followed by the digit 1 on your touchtone phone. Star 1 to ask a question. We will go ahead and pause for just a moment to assemble our roster. Our first question will come from Moche Orenbuch with CSFB.

Moche Orenbuch Thanks. Could you just give us a little bit of help understanding the differences between the gap earnings and managed earnings? I would have thought in the early stages of portfolio purchases, it would go the other way, in other words, gap earnings would be higher.

Yeah, we -- you do see these differences as we experienced in the 1998 acquisition that we did, and in that case, indeed, gap earnings were higher than managed earnings at that point in time, and with the advent of EITF 9920, what one might have expected at that time is not the case today, and that 9920 requires the use of lower of amortized cost or fair market value for gap purposes, and that's why the swing may be different than what you've experienced in the past, Moshe.

Just to kind of follow up, with the 10Q include information on the discounts in the portfolio and how they're being brought back in income?

Yes, it will.

Thanks.

Our next question comes from Mark Alpert with Deutsche Bank.

Good morning. You know, I guess I sort of have similar questions as Moche. To the extent possible, could you talk about the accounting on the purchased portfolio and the impact on the income statement? Also the funding of it, does that create opportunities to realize some of the discount -- you know, I know that you did when you securitized the first distressed portfolio from Citibank, and maybe if you could compare the accounting to that. And I have no idea what EITF 9920 is or what the impact is.

Mark, one of the things that we intend to do in our meeting we're going to have on December 12th is to go into a pretty detailed discussion of the difference in the gap and the managed earnings number. For this quarter and looking forward as to what we expect the managed to be and what we expect the gap to be on a go-forward basis. As J. Paul indicated, a lot of this information is going to be in the Q that will be coming out tomorrow, and I think that while it is a good question, in general, the difference in managed and gap is the due to the way the cash flows are coming in on these purchased portfolios, and we intend, like I say, to go into that in some detail because we know people have some questions about it, in the December 12th meeting.

Then maybe if I could try rephrasing a little bit. Where would you say operating cash earnings came in for the quarter? Are that they the same as managed, different than managed?

That's going to be the managed number.

So managed and operating cash are pretty much the same?

Yes.

Okay. Can I ask just one more we? I know you're not a bank, but I was wondering to what extent are you following FFIEC guidelines, let's say, on losses for anticipated uncollectable finance charge and fees and other FFIEC guidelines?

During the second quarter, we changed some of our estimates on collectability on the finance charges and that kind of thing, so we addressed that piece of the FFIEC guidelines in the second quarter, and our approach has been that we want to go ahead and be moving to adopt the various FFIEC issues. Although we're not a bank, we have traditionally reported similar to the way banks do, and so that's the area we're moving in.

Thank you.

Thank you. Our next question comes from Caren Mayer from Banc of America.

Good morning, guys. I think Dave captured my questions. On the discount, that sounds like that is going to be disclosed in the 10Q?

Absolutely.

Okay. We'll just wait for that. Thank you.

Thank you. Once again if you would like to ask a question, please press the star key followed by the digit 1 at this time. And our next question comes from Parks Brown from A.G. Edwards.

Morning, guys. Thanks for, to start with, I guess, communicating the guidance for this past quarter which now I guess looks conservative and not disappointing in what's a tough environment. I haven't heard anything about the class action lawsuit from the share shareholders in a while. Can you all shed some light on that?

Sure. We're pleased to report that the court granted our motion to dismiss that lawsuit in May of this year, the court entered an order dismissing the complaint with prejudice. So we were pleased to get that behind us and the result was as we anticipated it would have been.

Great. Thanks a lot.

Thank you. We'll now go to Moche with a follow-up.

Moche Orenbuch Thanks. On a completely different tack, Rich, you made some comments about being a better time than in the past to originate accounts. Can you kind of give us a little sense as to the scale that you would anticipate, you know, over the next several quarters, what amount would you expect to invest and how many accounts do you think you can add?

Sure. In the current quarter, we're not going to do much originating other than testing. I think that if you look forward to the first half of the year, we could easily begin originating in the 100 to 200,000 accounts per quarter, and that would, though, probably commence, I would say, later in the first half of the year, more like the second quarter than the first quarter, simply because our view of the current market is that there will be more distressed assets to buy potentially in the next several months. But we would not anticipate, Moshe, originating new accounts at the volume we did in the past because although the competitive environment has clearly improved, the economic environment has not necessarily improved, and we would want to be cautious and only go after areas where we thought we could have the appropriate profitability to compensate for the risk we'd be taking.

One other, if I might, and that is, is there a scale level or some kind of constraint in terms of the amount of portfolios you could purchase? How should we think about, you know, the size, whether it's liquidity or operational issue in terms of of what's likely to come down the pike.

Right. Well, when you look in the span of about two and a half months, we basically doubled the receivable base that we were servicing and more than doubled the number of accounts that we were servicing and so we are very comfortable now that having gone through that, built that out and as I indicated with very few hiccups, that we could -- you know, that the scale is that we could probably double again in size in the right purchase opportunities. So we're very comfortable in our ability to ramp up the servicing and the collection areas that are needed to effectively service this. As you know, our systems work, the horse bar that goes behind deciding how we're going to treat each account, is extremely scalable, and the difficult part of bringing on a lot of new business is the people aspect of it, which we have a long-term experience with and are comfortable that we can continue to successfully grow that part of our business when it's needed.

Great. Thank you.

Thank you. We'll next go to a follow-up from Mark Alpert.

On the Fingerhut portfolio, is that strictly a liquidation of the portfolio or are you going to be looking to issue [aspire] cards to those accounts or some of those accounts, and how is that portfolio funded?

That portfolio, the purchase was funded through a loan as well as the securitization that Fingerhut already had in place that we continue to fund through that securitization that was already in place, and we are looking at ways that we can continue to do business with this customer base on a long-term basis. Obviously as with any portfolio that we purchase, there's some portion that is going to liquidate out, but there's also in any portfolio that we purchase a healthy portion that we want to have a continuing relationship with over the long period of time, and that's what we're doing with Fingerhut.

You said partly with the loan. I don't see any -- on the balance sheet, I don't see where that would show.

We borrowed and paid off all within the third quarter.

And is there any -- are there any significant changes in the agreement with CB and T than the previous agreement?

There are some changes. In large part, it is a very similar agreement and it's an agreement that addressed a couple of issues they wanted to address and addressed a couple of issues that we wanted to address so there are a couple of changes, but by and large, it's a very similar agreement that we're real happy with.

And it does not restrict our ability to market as we've marketed in the past.

Right.

Okay. Thank you.

Thank you. Our next question will be a follow-up as well from Caren Mayer.

I just wonder, and we look at the market, there seems to be so many distressed assets out there, can you talk about your appetite for assets beyond credit card receivables, and is that something you have the capacity and appetite to look into it?

I think clearly, there would be some appetite at the right price on some other asset classes. By and large, though, we think that there is going to be plenty of activity in the credit card area, and we think that we can fill our plate up with credit card assets and not have to look to some of these other areas.

Thank you.

Thank you. As a final reminder, if you would like to ask a question today, please press the star key followed by the digit 1. Our next question comes from R. H. O’Shea from Millennium Partners.

R H O’Shea: Two questions. I don't totally understand the share count. Can we go through that?

Yeah, we can work through that. Essentially the number of shares that is disclosed on a basic and fully diluted basis includes a conversion of the preferred stock or an assumed conversion of the preferred stock because excluding that stock, that stock is diluted at the income levels that we have. So that basically gets you from the 46 million or so up to 51 million, and then there is -- that's in the basic calculation, the 51,000,132, and then on fully diluted calculation, you've got 51,000,140, which reflects some level of stock options that are in the money and, therefore, dilutive in that calculation.

R H O’Shea: OK, but then we take off going forward. Is there more preferred that that will get included as the earnings come through, or is that fully in there now?

It's got nothing to do with the earnings, the preferred stock does have a payment in kind dividend that comes, so there are some additional preferred shares that go out as a payment in kind dividend, but it doesn't necessarily --

Right. It will increase modestly as level of payment in kind dividend increases over in successive quarters.

R H O’Shea: So if you don't assume any additional share repurchase but you just take the 300,000 shares you bought since the end of the quarter, what would you expect the year-end share count to be?

I'd say 300,000 -- just one second.

It would increase probably about 100 to 125,000 shares.

R H O’Shea Okay. Okay. And, you know, is it possible -- I don't really understand the reconciliation between the owned and the managed earnings. Is there any way to explain that maybe a different way or even to just explain what the adjustments would be to get from the 43 to the 86?

No, that's what -- I don't think that there is a real quick way to do that on this call, and that's what we intend to go through on the 12th.

R H O’Shea: Okay. In terms of your previous guidance, last quarter you gave guidance of 35 to 45 cents for the fourth quarter. Is that still in effect? Even also, you know, given the new share count? And I guess the same question, you know, for the full-year guidance that you gave, 1.10 to 1.25.

I think that we are looking at primarily the guidance we're looking at is based on the managed numbers and once again, we intend to, at our December 12th meeting, go through what we're looking at for next year and sort of walking through what we anticipate to be the difference in the gap number and the managed number on a go-forward basis.

R H O’Shea: Okay. And was all this guidance that you gave in June, did that assume any additional portfolio purchases?

No. No, it did not.

R H O’Shea: Okay. And is it possible to explain now what the difference is between how other companies think of charge-off versus what it means to say economic charge-offs? I don't totally know what that is.

I think all companies in the credit card space have the same charge-off metrics, if you will. The difference is, what Rich was pointing out is that when you look at master trust data versus data that we report as an overall company, that those charge-off rates sometimes are slightly different because of the denominator effect, and that's true for all companies if you look at their master trust data, it's going to be slightly different than what their reported numbers are.

With respect to our economic charge-offs, that's what J. Paul spent quite a bit of time trying to explain, I did in last quarter as well. There's a section in the 10Q that talks about we disclose all of our dollar charge-offs and also explain our economic charge-offs based on the way we account for purchased portfolios.

R H O’Shea: Okay.

We are consistent with other companies in terms of the net charge-off calculation that you'll see in the 10Q, and consistent with the way others would handle the fact that you've got an embedded or inherent discount in your purchase price when you acquire distressed portfolio for credit quality which adjusts that net charge-off number, and that's explained in the 10Q as well, to illustrate the adjusted charge-off rate or what I've used as the term "economic charge-off rate" in today's call, and that will be set forth in the 10Q.

R H O’Shea: Okay. I mean, if I could just end with one comment but I'd like your response is that you have terrific results, but your release doesn't have nearly even a fraction of the information that we need to sort of understand, you know, the restructuring that's really taking place here, and the fact that you're releasing on the 12th, you know, you should have just put out the Q at the same time so that we could have had all the data maybe, you know, for next quarter we can think about that. It would make it a lot easier for those of us who are trying to figure this out.

Point taken, and our belief is that we are an opportunistic company, and as we've tried to lay out that we are looking at growing our business both organically as well as purchasing, and there are going to be times when the -- because of the way the purchase activity comes in, that it's not as easy to understand and walk through as a company that's only originating accounts. That's why we made the decision to have this meeting to try to give a lengthy period of time for people to ask their questions, for us to walk through all of these issues, and our thinking was that it's better to give people the Q and have the meeting after the fact such that there's a full vetting of any issues that are out there, and hopefully get people to the point of understanding our business better at that point.

R H O’Shea: I'll look forward to it at that point. Thank you.

Thank you.

That's all the questions we have for today. I'll turn the call back over to Mr. Hanna for any closing comments.

Once again, thank you all for participating and we look forward to your interest in our meeting in December.

Thank you. That does conclude today's conference. We appreciate your participation, and you may now disconnect.--- 0