Atlanticus Holdings Corp (ATLC) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2005 CompuCredit earnings conference call. My name is Jackie and I will be your coordinator for today. At this time all participants are in a listen-only mode. we will be facilitates a question-and-answer session towards the end of today's conference. If at any time during the call you require assistance, please press star followed by zero and a coordinator will be happy to assist you. I would now like to turn the presentation over to your host for today's call, Mr. Jay Putnam, Director of Investor Relations. You may go ahead, sir.

Good morning and thank you for joining us for CompuCredit Corporation's third quarter 2005 earnings call. Before we get started, I would like to remind you that today we will be making forward-looking statements. These forward-looking statements include all statements of our plans, beliefs, or expectations of future results or developments, including our plans and expectations with regard to the timing and impact of the CardWorks acquisition; our charged off paper, stored value card and auto finance operations; our acquisitions of portfolios, assets or complementary businesses from third parties; the performance of our originated and acquired portfolios, including growth, net interest margin, net charge off, adjusted net charge offs, and delinquency rates; the impact of recent Gulf hurricanes on our delinquency rates and charge off expectations; the impact on our business of recent bankruptcy law changes; and general economic conditions.

You should read the forward-looking information section of our report on Form 10-Q for the quarter ended September 30, 2005 and the risk factor section of our report on form 10-K for the year ended December 31, 2004 for a summary of some of the more important factors that may cause actual results to differ materially from those 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 would like to discuss. You may also access our website in order to obtain a hard copy of the press release our financial statement or to listen to an archived version of this conference call. I will now turn it over to David Hanna, Chairman and CEO of CompuCredit for his remarks.

Thanks, Jay and thanks to all of you for joining us. Today we will review our performance during the third quarter, update you on the current state of our business, and share some thoughts about our outlook and strategy. We'll also provide some commentary on the CardWorks acquisition that we announced during the quarter. J. Paul Whitehead, our Chief Financial Officer, will discuss the financial metrics for the quarter in greater detail. After our prepared remarks, we'll be glad to answer any questions that you may have. Yesterday we reported earnings for the third quarter of $52.7 million, or $1.05 per diluted share. This was a 39% increase over our third quarter 2004 results. Our net interest margin was 23.2%, an all-time high for CompuCredit. Credit quality has also remained strong, as are 60-day delinquency rates at September 30 of 9.6% and that was 110 basis points lower than at September 30th of last year. Also, our adjusted net charge off rate was 7.8% for this year's third quarter versus 8.3% in last year's third quarter.

Moreover, when you focus on our net charge operate, which does not include the effects of acquisition discounts associated with our prior credit card portfolio purchases, you will note that it has fallen 260 basis points between the third quarter of last year and the third quarter of this year, down to 10.4% for this year's third quarter. As usual, I'll start with our credit card business, which continues to represent more than 90% of our business. Our credit card business again posted strong growth, credit performance, and profits for the quarter. As I mentioned in last quarter's call, we have increased our marketing spending over the last few months and we added over 360,000 new accounts this past quarter. This is one of the highest quarterly account growths in our history. We currently believe that our marketing programs will generate over 400,000 new accounts during the fourth quarter of 2005.

We're adding these new accounts across the underserved consumer credit card spectrum. Our marketing programs are continuing to produce attractive response rates at attractive acquisition costs. Our target market is large and vibrant. We know there are approximately 80 million consumers with FICO scores below 660. We began our business in 1997 to offer general purpose credit cards to these customers and we continue to find robust growth opportunities among this same consumer base. Our focus on this particular market segment over an 8 year period of time has allowed us to continue to refine our models and our learning, enabling us to continue to improve upon the portfolio metrics. Our continual testing of products and rates allows us to refine our product offerings to the most desirable products for our customers.

We are also confident that we will be able to enhance our models with the CardWorks acquisition. We believe that the combined companies of CardWorks and CompuCredit will have as much or more data mining and modeling capabilities of anyone in the industry for the underserved market. Unlike some other recent quarters, all of our credit card growth this quarter was organic, as we did not purchase any credit card portfolios during the quarter. We continue to look for attractive investments on that front. We are hopeful that the continuing consolidations in the financial services sector will lead to opportunities for us to acquire portfolios. Within our credit card segment this past quarter, we securitized our Fingerhut portfolio to enhance our existing liquidity position. This was the third time that the Fingerhut receivables have been securitized, which says a good bit about the cash flows that they have generated for us.

Given the ease with which we have been able to securitize the Fingerhut receivables and given our announcement of the CardWorks acquisition and other business and corporate development opportunities we have in the pipeline, we felt it was the right time to get some more leverage against this portfolio. We are very pleased to have signed an agreement to purchase CardWorks during the third quarter. The transaction is for $270 million cash and we anticipate a closing late in the fourth quarter or sometime during the first quarter of 2006. CardWorks is the parent company of Merrick Bank and Cardholder Management Services. I'd like to speak briefly about the approach we intend to take with CardWorks and it's subsidiaries. I have been asked a few times since the announcement if we felt like we had the managerial ability to take over this business unit. The short answer is that I believe that we do have the ability to do that, but I would be giving up one of the most important things that I think we are buying, namely an outstanding management team.

CardWorks has been a friendly competitor of ours for a number of years. We have known the management team well and we have always believed that CardWorks is one of the companies that operate in the underserved credit card business in the right way. That is, they know how to make a nice profit while also treating their customers very well. They have a fairly similar approach to this customer segment that we have at CompuCredit. While they get to a similar end result, they go about it in a somewhat different fashion than we have historically done. We think these different approaches will allow us to both learn from each other, improving the business opportunities for both sides. We have all seen acquisitions and mergers that failed because there's too quick of a rush to actually merge everything to try and create cost synergies. While we hope to gain some synergies over the long-term, we can make a very attractive return on our investment by growing each side of the business.

We are determined to let each business continue to operate as it has for the foreseeable future. We intend to have a great deal of information sharing, but we see no need to collapse management teams together. We have our version of the business hippocratic oath, first do no harm. Put another way, if it ain't broke, don't fix it. As I mentioned earlier, we are impressed with the team at CardWorks and we intend to keep them at the task they have been performing well together for a number of years, building an outstanding credit card and credit card servicing company. The acquisition of the bank, Merrick Bank, requires a change of control application for both the State of Utah as well as the FDIC. As with all of CardWorks, we plan a business as usual scenario for Merrick Bank, as we expect its management team and board to remain fully engaged in managing the Bank after the acquisition.

CompuCredit intends to continue to work with its bank partners to issue credit cards and other products as it has for a number of years. We currently have relationships with five bank partners for our products and services with Columbus Bank and Trust being the largest and longest serving partner. We anticipate that all of these relationships will continue to grow in the coming years. The other side of CardWorks is Cardholder Management Services, which is a third party provider of credit card servicing and operational support. We have been in the process of developing our own platform to market third party servicing and our expected acquisition of Cardholder Management Services will give us an established platform, a customer base of household names in the consumer financial services in the U.S. and Canada, and yet another diversified income stream. We are hopeful that the consolidation of many companies in the credit card industry will afford us the opportunity to act as a third-party servicer for many entities.

We have already begun to work with the team at CardWorks to leverage relationships to try and bring on some new servicing contracts. CardWorks runs a profitable business and we expect not only a positive earnings contribution from their business, but also a lift from adding their terrific management team and employees base to our company. We are excited about the opportunities that lie ahead for both our customers and our employees with our acquisition of CardWorks. Before moving on to our other business lines, let me take the opportunity now to highlight an announcement that we made last night that involves First Bank of Delaware, one of the five issuing bank partnerships that I mentioned previously. We announced last night that our Purpose Solutions subsidiary has signed an agreement to launch a new credit card offering for us through First Bank of Delaware on the Discover Network. We are very pleased with both of these new relationships with First Bank of Delaware and the Discovery Network, which serves millions of customers in millions of locations.

Moving on to our Jefferson Capital subsidiary, which invest in previously charged off receivables, we note it's continued positive contribution to our business since the transaction we had with Encore last quarter. Jefferson Capital's focus continues to be on our balance transfer program and on the purchasing and processing Chapter 13 bankruptcies. Like with our credit card business, we are constantly testing and refining our models for the purchase of debt, as well as the purchase of bankrupt accounts. We anticipate that the change in the bankruptcy law will change some of the liquidation curves for the bankrupt account. Jefferson Capital will evaluate the effects of recently enacted bankruptcy legislation on Chapter 13 liquidation curves and pricing, and will grow this aspect of its business prudently based on this evaluation. Our auto finance business generated earnings in line with our expectations. Since our acquisition of this business from Wells Fargo in April of this year, we have continued to use their systems and processes until we can get our own infrastructure in place.

Our system conversion is proceeding as anticipated. And while the business is performing in line with expectations, we anticipate being able to look at this business as a greater contributor to our growth once we have the new system in place. We now anticipate that we will have this in place by year-end. Our expectation is that we will then be able to look at growing more aggressively in this business line during 2006 and beyond. Our retail microloan business also posted results in line with our expectations, as they continued to differentiate itself from monoline source. We believe that the retail stores that we have purchased or opened are a great delivery channel for certain segments of the population. While there are many people that we can market to effectively through telemarketing, direct mail or the Internet, we believe there is a large segment of the population that it makes sense to market to directly through store front locations. We have created a broad suite of products that are available through our store fronts to meet a wide variety of consumer needs.

In addition to the more traditional microloan products offered through our store fronts, our lending products now include installment loans, auto loans, and traditional revolving credit card products. Our vision is to provide consumers with a wide variety of options so they can choose the product that is right for their particular situation. I would like to close my prepared remarks by mentioning some nice recognition we received during the quarter. CompuCredit was ranked number two on Fortune magazine's list of the 100 fastest growing companies, which used three years worth of profit and revenue growth, return on equity, and other data to compile the rankings. This type of recognition is a tribute to the team that we have at CompuCredit and the financial success that we have had over the last three years. With that, I'll go ahead and turn things over to J. Paul now for his more detailed discussion of our financial metrics.

Thank you, David. To recap our results for the third quarter, we achieved GAAP net income attributable to common shareholders of $52.7 million, which represents net income per common share of $1.05 on a fully diluted basis. At the end of the third quarter our book value per share increased to $15.58, up from $14.47 at June 30th of this year, and our equity to managed loans ratio was 31.7%, up from 29.8% at June 30th of this year. Our liquidity position continues to remain at all-time high levels for us as we had over $451 million in liquidity available to us at September 30th of this year. This $451 million includes approximately $82 million in unrestricted cash on our balance sheet, along with amounts that we can draw from our existing securitization facilities given our collateral base of principal receivables. As David noted, our liquidity position at the end of the quarter benefited from our securitization of the Fingerhut receivables.

In anticipation of forth coming liquidity needs, in part associated with the $270 million CardWorks acquisition, we took the opportunity to pull in $31.6 million in cash by securitizing the Fingerhut receivables for yet a third time. We also are continuing to explore new sources of capital to facilitate our acquisition and growth goals. If market conditions prove right for us, we may leverage other assets through secured finance or securitization transactions. We may issue convertible or other debt instruments or we may raise capital through equity or equity linked instruments, possibly in the near future. Turning to some of the financial, operating and statistical data associated with the receivables that we manage. Our average managed receivables grew to $2.4 billion in our third quarter. Average managed receivables consists of receivables underlying our credit card securitizations and loan and fee receivables on our balance sheet.

This $2.4 billion amount is net of our partners separate economic or minority interest in the portfolios that we have acquired in the fast from third parties. We're extremely pleased with the comparison of some of our key managed receivable statistics between the third quarter of this year and prior quarters. All of our key statistical measures are much improved relative to what we thought was a pretty solid performance this time last year. David noted, our highest ever quarterly net interest margin of 23.2% in the third quarter of this year, as compared to 21.2% during last year's third quarter. He also noted the market improvements in our net charge off rate, which is 10.4%, is down 260 basis points from last year's third quarter. Our adjusted charge off rate, which is 7.8%, is down 50 basis from last year's third quarter. And our 60-plus day delinquency rate, which at 9.6% is down by 110 basis points from the rate at September 30th of last year.

The 200 basis point jump in our net interest margin for the third quarter this year, as compared to the third quarter of last year, demonstrates the lower finance charge and late fee charge offs that we have experienced, along with the higher yields generated by our auto finance business, which we didn't yet own in last year's third quarter. The decrease in our adjusted charge off rate to 7.8% from 8% last quarter and 8.3% in the third quarter of the last year, reflects a combination of strong collection efforts, seasonal affects, credit quality improvements within our portfolios, and the beneficial effects of new account growth. Barring any material portfolio acquisitions, however, we expect our various charge off ratios to move upward in the fourth quarter in accordance with normal seasonality patterns.

Looking beyond seasonality as a factor for our fourth quarter charge off ratio expectations, we should note our belief that our credit exposure associated with the recent Gulf hurricanes has been appropriately factored into our allowance run collectible accounts and retained interest valuations on our GAAP financial statements. Fortunately, our potential credit exposure here has not been significant. By way of example, only 0.9% of our credit card holders resided within the zip codes of the areas damaged by the hurricanes. While there can be expected to be some marginal increase in charge offs associated with the hurricanes, we do not believe that the hurricanes will materially affect our future charge offs or charge off ratio computations. As far as the hurricanes' effect on our net interest margin goes, we should note that where appropriate we have proactively relaxed payment requirements for hurricane victims and we have suspended interest and fee charges on these affected accounts.

Although we can be expected to lose some yield through these actions, it's the right thing to do and we don't expect our actions here to have any material effects on our future net interest margin trends. Finally, as are other consumer credit card companies, we are still trying to gage the impact on principally our fourth quarter of heightened bankruptcy filing volumes prior to the October 17, 2005 effective date of the recently enacted bankruptcy law changes. We have recently experienced heightened bankruptcy charge offs in recent weeks as consumers rushed to file for bankruptcy before the October 17th effective date. And while we know that we have not experienced the full effect of these heightened bankruptcy filings due to the backlogs of filings within the court, we believe that the full effects of these heightened filing levels will be realized in our fourth quarter. Our statistics have shown over time that many of our consumers who have filed for bankruptcy have filed at a point in time after we had already charged off their receivables through the normal delinquency process.

While difficult to say with certainty, we currently estimate that our fourth quarter economics may be affected by $10 million to $15 million in incremental charge offs, and that much of the incrementally higher fourth quarter charge offs that we will experience associated with the bankruptcy legislation will offset future quarters' delinquency charge offs. Overall we're very pleased with the financial, operating and statistical data experienced with respect to our managed receivables during the third quarter. For the fourth quarter of this year, we certainly expect improvements in this data associated with our recent expected account growth. However, the unknown effects of the heightened bankruptcy filing volumes makes our normal process of estimating quarterly managed receivables data much more difficult. Netted against the list that we expect from our account growth will be incrementally higher fourth quarter charge offs attributable to the bankruptcy law change. Also, as we have previously mentioned, our marketing spending has been more robust than we were planning earlier this year.

Netting all these factors together, our best estimate at this point is that our managed receivables statistical data will play out during the fourth quarter at a level of performance of about 75% of that demonstrated by our actual third quarter data. We are also quite pleased with our GAAP earnings results in the third quarter this year. Our GAAP earnings were favorably influenced by the securitization of the Fingerhut receivables, finance charges and fees generated by our on balance sheet credit card offering, and our second quarter 2005 auto finance segment acquisition. Our 10-Q filed yesterday sets forth several reasons for our differing third quarter income levels between 2005 and 2004, and I would invite you all to review our third quarter 10-Q filing for additional details underlying each of the many factors that effect our GAAP earnings.

In closing, again we would like to stress that we are keenly focused on choices in investments that target long-term economics rather than short-term for GAAP earnings results. While our GAAP financial statements results, [can] the times be volatile based on securitizations and acquisition activity, we run our business with a long-term economic view. Our financial results continue to be stronger than at any time in our company's history and we expect continued success with the expansion of our business. With that, David and I will be happy to answer any questions that you may have.

Ladies and gentlemen, if you wish to ask a question, please press star followed by one on your touchtone telephone. If your question has been answered and you wish to withdraw your question, press star followed by two. We'll take questions in the order received and wait a moment to compile the questions. Your first question comes from Sameer Gokhale from Bear Stearns. You may go ahead.

Hi, good morning. Just a couple of quick ones first. I was wondering if you would consider reporting managed basis earnings per share, as well, because there seems to be lot of confusion about the $1.05 that you've reported versus what the analyst community seems to have estimated for you guys. I'm estimating that you on a managed basis EPS of about $0.87 compared to our estimate of about $0.86. It seem likes a fairly simple reconciliation. If you would be able to provide that, I think that would be helpful to investors. So have you considered providing that, perhaps, anytime in the near future?

Yes, Sameer, we actually have thought about that issue for some time now and I think our preferred approach is to continue with reporting the accepted measure of earnings, which is the GAAP earnings measure, without actually reporting earnings per share on a managed basis. We do provide a lot of statistical data, which we think is helpful to investors in understanding the performance of our underlying credit cards and our other operations. And I know that you guys perform various calculations associated with that and we're happy to continue providing those statistics. But as far as our reported earnings measure, we prefer to keep that on a GAAP basis.

Okay. Then also on another note, I think you were talking about growing your organic portfolio. Any idea whether we could see you guys show your trust data again on a monthly basis, so that investors can look at those trends?

I think the -- the last time that we had reported trust data on our website, we were in a little bit of a different situation at that time, in so far as having a number of different investors, ABS investors, that are out there, and the data was, with a big investor base, being fairly widely shared. We felt like we had an obligation to put it on the web. Now we've got a fairly small base of investors within our ABS transactions and the FD concerns, if you will, about information being out there aren't prevalent like they were there in the past.

Okay. And then I had a question on the acquisition -- on the CardWorks acquisition. Any sense that you can give us for how much that business earned over, let's say, the last 12 months, so we can get a better handle on what that could contribute to your earnings once the acquisition is completed. And I'm still a little bit unclear about the decision to have two different management teams. And I think maybe David made some comments publically about Merrick Bank, perhaps, not being used to originate CompuCredit receivables. And I know you guys have been pursuing a bank charter for some time now. So it seemed like a pretty smart thing to use this bank to acquire and to use it to originate receivables. So any further clarity you can give on that would be helpful.

We have -- first let me address the question about what our expectation is for 2006. We think if the transaction closed at the beginning of the year, that we would be looking at something in the neighborhood of $0.50 per share, give or take a little on either side. But that would be our expectation for the amount of additional earnings that will come from that transaction. In terms of the issuing of cards and the like, we have built our business through strategic partnerships with several bank partners that have been very successful for us. And so we intend to continue to operate with those same bank partners here at CompuCredit and CardWorks will continue to originate cards, as they have done, through Merrick Bank. We don't see a need or a desire to shift over our issuing to Merrick Bank. We think it makes more sense to continue to have that business run as it has run profitably in the past. And for us to continue our relationships that we've had the past.

Okay. Thanks. And then one last question, maybe hop back in the queue. But as far as your capital levels, you still have a lot of seemingly excess capital and I think maybe your equity to managed assets level after the CardWorks acquisition could probably go down to maybe the 25% or so level from about the 30% level right now. I was wondering where, after that acquisition, where you see yourself operating that business. Is it like a minimum equity to assets ratio of about 20%? Where would you feel comfortable running the business?

You mean overall CompuCredit?

Yes, overall CompuCredit.

I think something in the high teens, 20, is probably the long-term right levels.

Okay. Great. Thank you very much.

And your next question comes from Moshe Orenbuch from CSFB. You may go ahead.

Thanks. Maybe just to kind of drill down a little more on the whole issue of liquidity. And then I have got a kind of slightly separate question. I mean, the 10-Q says you have got 450 million that you can draw out of the master trust. Could you just expand on what -- I mean you alluded to the potential for, or the hope for acquisition opportunities. How much liquidity and capital do you have available for that as we go into that period of time?

Well, the $451 million, Moshe, is a combination of the cash that we have on the balance sheet, plus the potential just to simply do a draw on our securitization facilities within a couple of day's notice, So the total liquidity number available is 451. You have got the CardWorks acquisition at 270, leaving the balance available for other growth and acquisition opportunities that we may experience. And as I said, we certainly at the capital markets look ripe for us, whether it's the ABS markets, or debt, convertible debt, or equity markets, we certainly would consider raising additional capital for other opportunity.

Okay. Separately, David, you had alluded to differences between the CardWorks strategies and your own. And you kind of made some comments around that in the last answer. Could you maybe just flesh that out a little more?

Yes, in essence, they've got a fairly robust set of models that they use to try to identify which customers to offer products to. And they operate their business a little bit differently as well, their collection side and their servicing business. And we just think that there are, having spent a fair amount of due diligence and the like, and subsequent to signings, spending a lot of time with those folks, we think there are a lot of things that they've done exceptionally well that we can learn from. And likewise, we think there are things that we are doing here that they might not have used some of the same tools in the past that they can gain from. So we actually think that there is -- while we've both been in a similar market, we've gotten to similar answers in different ways. And we think that that combined learning is going to be beneficial for both sides.

If you kind of had to put your finger on one thing that you've learned in due diligence from them that might help you do things better? I suspect in the other direction the collections would be an advantage of yours. But if you could kind of identify one of the things that you liked about what they're doing that you might incorporate?

I think a lot of successful modeling is based on robust data over the long-term. So one of the things that we gain from them coming this way is that the various FICO bands and niches that they have focused on are a little bit different, and they're kind of in between our upper tier and lower tier programs. So even though it's in the broad below 660 FICO, there are areas where they have focussed where we have not focused nearly as much over the years. And to be able to take that data over a five or six-year period of time that they have, we think that enables us to tailor and create better products to offer to our customer base, as well as helping to build out CardWorks' modeling systems, enable them to expand some of what they've offered in the past. So it's really that -- there are two critical elements to successful modeling and product offerings. One is having the systems in place. But the other, of equal importance, is having the long data stream that you get from a company that's been doing this really about as long as CompuCredit has, 8 or 9 years.

Great, thanks.

And your next question comes from Carl Drake from SunTrust Robinson. You may go ahead, sir.

Good morning. I was wondering if you could touch on the results from the other diversified businesses. They came in a little bit lower than I had expected, particularly in the other category, where there's some unusual expenses in there.

I think that we have ramped up some of our business development, if you will, within that category, developing out some new products and services. Some of those we've launched, but it's more one of new product development, I think, that we've got going on in the other categories, is way you saw that spike up a little bit.

Should we expect that to turn positive over the next several quarters?

We certainly hope so.

What about -- should we expect acquisitions in auto or retail microlending? Is that an area where you might be opportunistic from building the platform through acquisitions?

We are always in the market for additive acquisitions that we feel like we can go in and on the day we close the transactions feel good about it. We're not, I think, ever going to be the type of company that looks and says, okay, we can buy this business and within three years we hope it adds something to our earnings per share. So we -- any acquisitions in businesses that we are currently in, or business lines that we think are a nice complement, that we think can be accretive fairly quickly, we're going to be interested in.

Okay. I've got a couple of other questions. The Merrill Lynch facility that's got very attractive advance rates, I believe that comes up for renewal in January?

We just renewed that at the end of the quarter.

Okay, great. And then last question in terms of color on new account growth. Is that primarily the low FICO card or is there -- is it a balance between the low FICO and the near prime offering? And what should we read into trends going forward in the key managed stats?

It's a pretty good balance in terms of the numbers of accounts across both the upper tier and the lower tier. And, obviously, if it's a similar balance in terms of account numbers, the upper tier would have larger balances. So over time, you would see more growth in balance in that area than the lower tier.

Okay. Thanks.

And your next question comes from Jed Gore from Sunova Capital. You may go ahead.

Great quarter and interesting stuff you guys are doing strategically. Thanks for taking my question. I just had a quick question. It's late in the earnings season and my senses are dulled. I was trying to recap your net charge off guidance that you gave at the end of your prepared remarks. You said you thought the charges would go up a little bit on seasonality and credit exposure. And I think you said something about managed receivables fourth quarter would be 75% of actually third quarter data. Can you recap that? I'm sorry.

Yes. I think you pretty well have it. We -- I said that we expected incrementally higher charge offs associated with the bankruptcy legislation.

Okay.

Above and beyond kind of what we were planning for, $10 million to $15 million. You got that factor, you've got the improved growth that you saw in the third quarter and what that will contribute in the fourth quarter on our account volumes and our expectations in the fourth quarter on account volumes. You've got marketing spend as a factor. And all of that netted together tells us -- fourth quarter seasonally is typically lower than the third quarter, in the way of the economic or how the data plays out. And we just feel like that that data will be roughly at about 75% of what the data showed in the third quarter.

Right.

Okay.

Additional to what J. Paul was saying about the bankruptcy law change, our expectation, and I think that others in the credit card industry have indicated the same thing, our expectation is that this increase during the fourth quarter probably means a lower bankruptcy charge offs during the first six months of 2006.

Lower -- right, because you are pulling it forward. Okay, I understand that.

Other than the backlog in the courts, we can expect that bankruptcies will be way down in November and December, filings will be way down, but the backlog is going to take a while to push through the system.

Right.

In this page three of your release, the number of accounts, you have 3.3 million versus 3 million the previously quarter. That's the net number of -- that's your total new accounts you added, 226,000 accounts, in the quarter. Is that correct?

No, we added 360,000 accounts and so that would be the net number.

That is the the net total accounts that we have at the end of the quarter.

Great. Great work. Thank you very much.

And you have a follow-up question with Sameer Gokhale from Bear Stearns. You may go ahead, sir.

Thanks. Can you hear me

Yes.

Okay. I had a question on response rates. What are you seeing there compared to, say the last couple of quarters? Are you seeing a pick-up in response rates from your marketing activities?

We've seen a -- we have seen it improve some. I wouldn't say that the response rates have jumped dramatically or anything, but they've picked up a little bit to the positive for us.

Okay. And is there any level at which you would get a little bit concerned if response rates rise dramatically, that maybe there's increased risk of adverse selection? How do you think about that, because it seems like if response rates all of a sudden jump a lot, then that may be a sign that borrowers are more desperate for credit and you don't want to lend to those kind of people?

That's a fair question. We attribute the uptick in response rates to our better target marketing, as opposed to -- so if we were sending solicitations to the same 100 people every month and we had an uptick, then the concern about adverse select, I think, is a valid one. Because we are always refining and enhancing, we think that the uptick is due more to our target marketing than it is to adverse select. But we also monitor exceptionally closely early performance of all of our new customers and take a lot of steps in the account management process to insure that those customers that come on, that we don't have adverse selectors and the like. And we would see that information pretty quickly coming in the door if you had an adverse selection problem, which we have not seen. In fact, some of our early data actually looks better than it did six months ago or so.

Okay. Thank you. And then also, we're hearing that, I think, Capital One has put its balance transfer portfolio up for sale, something like $5 billion in fees and that, perhaps you guys are bidding on that portfolio. Any sense for when you think that transaction -- when you'll find out whether or not you've won the bid?

We take the approach that we don't talk about any acquisition opportunities that we may or may not be looking at. So we will pass on discussing that acquisition.

Okay. And then last question was can you give us or tell us what your average FICO score is currently on, say, your originated portfolio?

I don't have that data with me right here. It is -- I can tell you that it is has not changed much over the last 12 months of where we're going.

Okay. Great. Thank you very much.

You have a follow-up question with Carl Drake from SunTrust Robinson. You may go ahead, sir.

Thanks. Just a big picture question in terms of the health of the consumer looking into 2006, with rising energy prices and the like. I was wondering if you could touch on, aside from the recent bankruptcy filings, what's your overall view of the health of the consumer as going into '06.

We have -- had you told me in January that we were going to have gas prices and fuel costs where they were late summer, early fall, I would have told you I would have anticipated that our delinquency trends would have been worse than they have been. We have been monitoring that, watching that, because our customers are affected by gas prices and the like. And so the takeaway that we have is that we believe that the underlying consumer base is doing pretty strong. I guess the economic growth numbers that came out last week were pretty strong and surprised people on the strength of those. We think that's filtering down to our customer base, because even with the higher fuel costs, as you say, we haven't seen a meaningful degradation in our delinquency rates or loss rates.

Okay. And do you feel that some of the other businesses might perform better in a down turn wind, when and if that happens, some of the other diversified businesses or J cap?

We think so. We -- all of the problem account purchasing we think is going to probably be strong in any kind of down turn. So while we have not purchased a great deal of new receivables in the Jefferson Capital subsidiary, we think if we did see a downturn, that that would be the time to step-up the purchasing activity there.

Okay. Thanks.

And at this time, you have no further questions, so I'll turn it back over to management for a closing comment. Thanks again, Jackie, and thanks again to everyone for joining us this morning.

Have a great day. Good-bye.

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