Atlanticus Holdings Corp (ATLC) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the CompuCredit Fourth Quarter 2005 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will conduct a Q&A session towards the end of today’s conference. [Operator instructions.]

I will now turn the call over to Mr. Jay Putnam, Director of Investor Relations. You may proceed please.

Good morning, and thank you for joining us for CompuCredit Corporation’s Fourth Quarter 2005 Earnings Call. Before we get started, I’d 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 competitive strength, our plans and expectations with regard to our marketing efforts, our gross and operating expenses, our originated portfolio growth, the performance of our originated and acquired portfolios, including net interest margin and adjusted net charge-offs, our plans with respect to new products, growth within our auto finance segment and our micro-loan and stored-value card operations, our expectations and plans with respect to the Cardworks acquisition, our plans for future financing, our earnings expectations, and general economic conditions. You should read the forward-looking information section and the risk factor section of our Form 10-K for the year-ended December 31, 2004 and on our web site at www.compucredit.com in the Investor Relations section for summaries 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. We also encourage you to review updates to these same sections of our 2005 Form 10-K when it’s filed within the next few weeks.

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You may also access our web site to obtain a hard copy of the press release and our financial statement or to listen to an archived version of this conference call.

I’ll now turn it over to David Hanna, Chairman and CEO of CompuCredit, for his remarks.

Thanks, Jay, and thanks to you all for joining us this morning. I’m going to spend a few minutes reviewing our results and then provide some commentary on our business. I’ll then close with an update of our pending Cardworks acquisition. J. Paul Whitehead, our CFO, will then discuss our financial metrics in greater detail. After our prepared remarks, we’ll be glad to answer any questions that you may have.

Yesterday, CompuCredit reported full-year and fourth quarter results for 2005. On a GAAP basis, we earned $171.4 million in net income, or $3.34 per fully diluted share, for 2005, including $3 million and $0.06 for fully diluted share in the fourth quarter. 2005 was a record earnings year for us, as our net income was up 78% over 2004.

I’m also pleased to be able to report to you all that we have implemented new systems that enable us to publish our managed earnings, the non-GAAP measure used by investors and analysts to follow our performance and to reconcile these managed earnings through our reported GAAP earnings. Over the years, we have received a lot of requests from investors and analysts to report our earnings on a managed basis. We certainly recognize the importance of this metric, as we use it to the exclusion of volatile securitization-based GAAP accounting to manage our business and to forecast our anticipated future performance.

Our managed earnings were $3.53 per share for the full-year in 2005, and $0.36 per share for the fourth quarter of 2005. Our lower than initially expected fourth quarter results principally reflect greater marketing and other investments, the cost of developing marketing and testing new micro-loan products, and a spike in bankruptcies that was greater than we had anticipated, as consumers filed to beat the October effective date for the new bankruptcy laws.

Our higher than planned marketing investments resulted from opportunities that we saw at the market beyond what we had originally planned. With this additional marketing spend, we ended up adding a record number of new accounts during the fourth quarter, and I’ll expand on this a little bit later.

Our net interest margin improved to 22.3% for 2005 from 20.3% in 2004. We also continue to be very pleased with both the improvements that we have seen in credit quality between 2004 and 2005 and the current overall credit quality of our portfolio. Delinquent receivables are down from 14.1% at December 31, 2004 to 13.5% at December 31, 2005. And 90-plus day delinquent receivables are down from 7.6% at December 31, 2004 to 6.4% at December 31, 2005.

While receivables growth and the fourth quarter spike in bankruptcy charge-offs have helped our December 31, 2005 delinquency statistics to some degree, we note that the December 2004 statistics were depressed by the denominator effects of our Circuit City acquisition late last year. As acquisitions do not influence our year-end 2005 delinquency statistics, we really do believe we have seen meaningful improvement in credit quality that will help our results as we move into 2006.

Also supporting our beliefs that our overall credit quality improved in 2005, it’s a fact that our 8.5% 2005 adjusted net charge-off rate remained relatively consistent with our 8.4% rate in 2004. This held true notwithstanding the fact that acquisition activity significantly depressed our 2004 adjusted net charge-off rate, whereas our 2005 rate was not nearly as favorably influenced by acquisition activity. Moreover, our fourth quarter 2005 adjusted net charge-off rate spiked to 11.2% based on the effects of bankruptcy legislation and charge-offs that we took related to a lot of testing that we are doing with our Internet micro-loan offerings.

Considering all of these factors, we feel our ability to manage credit quality continues to be a core strength and one that will be a big driver of success in the years to come. While we are not able to pick how long the current economic expansion or the strength of the consumer will last, we do believe that our underwriting and account management processes will allow for our continued strength relative to other similar lenders no matter what the economic environment or state of the consumer.

Turning now to the topic of account growth and marketing of our originated receivables. We note that our $2.5 billion in managed receivables at December 31, 2005, we experienced 14% year-over-year growth in our managed receivables. As I mentioned before, we invested heavily towards the end of the year in marketing programs to make offers to both the near-prime and sub-prime consumer and we’ve been pleased with the receivables and account growth we’ve achieved.

We believe a few market conditions currently at work have resulted in a favorable environment for us to invest our capital in originating new credit card accounts. First off, unemployment has dropped to a 4.5 year low and a strong jobs market helps our business. Consumer confidence and spending also remained strong. Finally, the overall competitive environment is reasonable for us. While competition for upper-tier and near-prime customers has become more intense, we believe that the credit offers in the marketplace to these consumers are reasonable and do not appear to be irrational and solely for the sake of short-term growth, as we saw a few years back. We also continue to see a benefit from a relative dearth of credit offerings in the marketplace to our lower-tier customer base.

For the fourth quarter, we originated 477,000 new credit card accounts, which was our biggest quarter ever and which exceeded our initial plans going into the quarter. That brought our full-year originations to approximately 1.4 million cardholders, which represents a 153% gain over the 537,000 new credit card accounts that we originated in 2004. This is a trend we hope to continue into 2006 and for as long as the economic conditions in the marketplace remain favorable for us.

To focus now on some of our spending items, we note that we experienced considerable increases in operating and marketing costs between 2004 and 2005. With our operating expenses, we have a certain amount of fixed costs associated with the infrastructure that we have built to support our growth and diversification into new products and services for our underserved and unbanked customers. However, the vast majority of our operating costs are highly variable based on the number of accounts and levels of receivables that we service and the size and scope of possible acquisitions or investments to introduce new business lines, products, and services.

We expect to continue growing and diversifying our business into 2006 and we continue to strive for cost reductions through outsourcing and other cost control efforts. We do expect to see continued growth in our total operating expense level, as our plans for growth are realized and significant capital is required to upgrade our technology platform.

In addition, 2006 marketing promotions are slated to proceed at relatively the same level as the last few months, translating to a nominal increase over 2005’s marketing expenditures.

Let me now turn away from our credit card segment to give some details on our other business segments and our continuing diversification strategy.

Beginning with our Jefferson Capital subsidiary, which comprises our investments in previously charged-off receivable segments, we note that 2005 was the year of transition. If you’ll recall, Jefferson Capital sold a portfolio of charged-off credit card receivables having a face amount of approximately $2.9 billion to Encore Capital in the second quarter of 2005. Jefferson Capital also agreed to sell Encore up to $3.25 billion in face amount of future credit card receivable charge-offs at established pricing over the next 5 years.

While Jefferson Capital continues to acquire previously charged-off receivables and sell them to Encore for a fixed sales price under the forward flow contract, Jefferson Capital has focused its growth strategy on 2 other programs – its balanced transfer program and Chapter 13 bankruptcies portfolio purchasing. With the new bankruptcy legislation in place and a proprietary collection platform, developed through past experience and research and servicing Chapter 13 bankruptcies, Jefferson Capital is poised to study the effects of the new bankruptcy laws on Chapter 13 pricing and liquidation curves and to invest and grow, as appropriate, within this niche that it has carved out for itself.

Jefferson Capital’s balance transfer program involves a credit card offering as an incentive to debtors to repay their charged-off debt. This program not only allows Jefferson Capital to realize enhanced liquidation curves and what is now a competitive pricing environment, but it also allows Jefferson Capital to partner with other debt buyers to help them enhance their own economics.

Focusing on these 2 primary product offerings allows Jefferson Capital to keep its operating platform intact so that it can step back into more generic buying opportunities if market conditions change and pricing on the buy side gets more attractive. For now, our view is much as it was when we decided to sell substantially all of Jefferson Capital’s non-Chapter 13 and balance transfer portfolios to Encore in the second quarter of 2005. For all but a few niche areas, we believe the current charge-off market is a seller’s market. Fortunately, this works to our advantage within our credit card segment.

The retail micro-loan segment reported earnings of $9.8 million for 2005. As many of you will recall, this industry had to retool rather significantly in a few states in which companies, like ours, service micro-loans on behalf of FDIC-chartered banks. These changes were in response to new FDIC guidance, which limits the number of times that FDIC-chartered banks are permitted to allow customer rollovers of their micro-loans. Much of our retooling involved developing the systems and processes for a new installment loan product developed by the FDIC-chartered banks in response to the FDIC guidance.

Given these additional investments and the effects of the FDIC guidance on our servicing revenues, which are tied to the volume of installment and other micro-loans originated on behalf of our lending bank partner, we had to adjust in July of last year our expectations for second half performance of our retail micro-loan segment. Relative to our adjusted expectations and based on the new FDIC guidance, our fourth quarter retail micro-loan segment’s performance slightly exceeded our plans. While the transition to an installment loan product presented challenges to all of us in 2005, our lending bank partner, and we are pleased with the performance of the installment loan and plan to transition to this product to the exclusion of more traditional micro-loan products by April 2006 in the states in which we provide servicing for our lending bank partner.

Our experiences with the new installment loan product has led us to conclude that we should offer this product as part of our multi-product line strategy in all of our retail stores. We see a stiffening competitive environment for mono-line micro-loan companies and our strategy has always been to distinguish ourselves by having multi-product lines aimed at getting more foot traffic within our retail stores, which should serve to enhance our profitability.

Our plans for the first half of 2006 include expanding into 3 additional states and opening 45 new locations under the Purpose Financial brand. We plan to operate pursuant to a business model under which we will offer a wide suite of financial services, including Visa and MasterCard credit cards, Discover branded charge cards, stored-value cards, installment loans, auto loans, tax preparation services, and insurance products within our retail outlet.

We have made significant information technology and systems investments in 2005 to enable us to affect this strategy and we believe that our systems integration and conversion efforts are on track to support these 2006 plans. We plan to become the neighborhood financial services center for the financially underserved and to distinguish ourselves from the mono-line companies through a rich product line that provides consumers with choices that fit their current condition in the financial life cycle.

We also plan to help our customers by reporting their use of mainstream financial services to the credit bureaus to help them rebuild their credit. Through these efforts and our use of risk-based pricing, we expect to be able to graduate those consumers who want to improve their situation to better terms and financial products at lower cost to them. Our plans for our micro-loan segment are all set against the backdrop of a very dynamic regulatory environment. As always, we work to ensure that our product offerings are in compliance with applicable federal and state laws and regulations and we will proactively adjust the terms of our product offerings, if and when necessary, to ensure strict compliance with the laws and regulations of the jurisdiction in which we operate.

With regard to our new auto finance segment, we previously noted our efforts to develop a new system of record for this business that is intended to facilitate greater effectiveness and efficiency in adding new dealer relationships, products, and portfolios within this business. I am pleased to report that we have now converted to our new system of record from the Wells Fargo system of record that we were licensing from them after our acquisition of the auto finance business. With that management effort behind us, we are looking forward to growth opportunities within our auto finance unit.

With used cars sales up in November and December, compared to 2004, the market should present good opportunities for us to expand. We are excited about the potential to grow this business and we also think this platform allows us to look at potential acquisitions in this area as well. In the past, we might not have been able to bid on a portfolio of auto paper because we did not have the right servicing platform. We have removed that obstacle.

Now let me focus a bit on our activities within our other segments, which encompasses various activities that are startup in nature. As one can note from our financial statement, we have invested a fair bit in a variety of startup businesses in keeping with our diversification strategy. Moreover, as with any startup effort, there is a bit of experimentation that needs to occur as we work to refine our product offerings and businesses within our other segments. For example, we have experimented quite a bit in recent months with different underwriting processes and thresholds for a variety of Internet-based micro-loan products. This all in an effort to determine the right niche of marketing spend and system costs versus first pay defaults. These tests and the associated charge-offs of receivables generated through these tests have contributed 40 basis points to our higher fourth quarter 2005 adjusted net charge-off rate.

Additionally, our overall direction has shifted quite a bit over the past few years with respect to our stored-value card offering. Our customer responses to this product offering support our belief that unbanked consumers want the convenience and flexibility of a stored-value card. Nevertheless, the financial investments associated with our initial strategy of tying our technologies together with third party retail partners have proven too great relative to the revenue potential of this product offering. As such, we recently retooled our stored-value card offering to expand the utility of the product and to focus on distribution of this product as an adjunct to certain of our credit card offerings or as a downstream offer to consumers who come to us through Internet and other marketing channels and who may not be in a situation that currently warrants our extending credit to them through one of our lending products. Our expectations are that we can learn about the income and spending patterns of these particular stored-value customers so that we can gradually graduate them into our credit product.

We are also doing a good bit of marketing of merchant credit type or charge in credit card products over the Internet within our other segments. Several of these products are good surrogates for traditional forms of micro-loans offered by the mono-line companies and we believe that the underwriting and collection system that we are employing will allow us to see significant growth in these particular products throughout 2006.

It is our belief that the underserved and under-banked population of Americans is around 75 million customers. We think that CompuCredit, through its suite of various products and services, has a great opportunity to crack the code on an efficient delivery system for this customer base. Sometime during the next ten years we believe that there will be a company that is the leading provider of financial products and services to this customer base. It is our goal to be that company. One has to experiment and try different routes to get there, but we are convinced that we are making the right kind of progress.

Lastly, our other segment is currently building technologies to enable us to underwrite, service, and collect a wide variety of third party consumer finance receivables. With customers that we already have in place, we have begun to make some principal investments of our own in asset-secured consumer finance receivables, such as loans secured by motorcycles, all-terrain vehicles, and the like. We see these efforts as being complimentary to the third party servicing platform that we expected to obtain in our pending Cardworks acquisition.

In summary, through our other segment activities and by employing our credit and underwriting knowledge and leveraging and improving upon an established technology infrastructure, we can continue to develop and test new credit delivery programs. We see tremendous opportunity to grow our credit card and other lending businesses through the use of Internet lead generators and search engines and we expect many of the activities within the other segments to be profitable for us in the latter half of 2006.

Now let me give you an update on our pending Cardworks acquisition. We’ve been continually meeting with the Cardworks team and are most impressed with their talent level and the quality of their operations and earnings. We have seen their continued financial successes in the months that have followed since we signed our stock purchase agreement. And these successes are not just an important indicator for us as to the contribution they will make to our ongoing results when we complete our acquisition, but they also inure to our benefit, as all profits generated between the stock purchase agreement date and our ultimate closing date are to be retained within the Cardworks business.

We are awaiting approval from bank regulators on our acquisition of Cardworks banking subsidiary, Merit Bank, and we are hopeful about the chances for approval. As I mentioned on our last conference call, we plan for it to be business as usual for them, as their management team and board will be coming over as part of the transition. We expect the Cardworks acquisition to make a great impact on our future capabilities and profitability for 2006 and beyond and we are now hopeful that this transaction will close at some time in the second quarter of this year.

Finally, I want to thank all of our shareholders who participated in our 2005 shareholder charitable designation program through which CompuCredit donated $12 million to a variety of philanthropic causes. We remain focused on being a good corporate citizen and sharing our financial success for the greater good. I will leave you with my feelings that 2005 was a very solid and gratifying year and we are well-positioned for another outstanding year as we enter 2006.

As you have heard me say before, I believe that one of the most important things that we do as a management team is to properly allocate capital. We currently have in excess of $500 million to invest, a portion of which is to be used in connection with the Cardworks acquisition. We are actively looking at opportunities to put that money to work in high-return endeavors. Hopefully, we will find the right investments for us to make to get the kind of returns that we like to see during the first 9 months of 2006.

With that, I will turn it over to J. Paul for his more detailed financial review.

Thank you, David. First, let me review some of our chief financial operating and statistical data and then discuss some fundamental details of our financial performance.

To recap our results for the fourth quarter, we had GAAP net income of $3 million, which represents earnings of $0.06 per share on a fully diluted basis. For the first time in our history, we’ve also reported managed earnings, which were $0.36 per share on a fully diluted basis for the fourth quarter, with reconciliation of these managed earnings to GAAP net income, as required by applicable SEC rules.

At a new page to our earnings release, which provides managed earnings computation and a reconciliation of managed earnings with reported GAAP earnings, we have also published comparable year-over-year managed earnings numbers, as well as quarterly managed earnings numbers for the third quarter of 2005 and the fourth quarter of 2004.

David mentioned many of the factors that caused the variance between our expected and actual fourth quarter managed earnings, but it would probably make some sense for me to summarize these factors again here in one brief overview.

First, in November of last year, our Board of Directors approved our $12 million fourth quarter charitable contribution through our 2005 shareholder charitable designation program that David mentioned. Second, we incurred higher marketing costs than we had initially planned coming into the fourth quarter. These additional marketing investments bore fruit for us, however, through our generation of 477,000 new credit card accounts in the fourth quarter, 77,000 more accounts than our initially planned fourth quarter additions of 400,000.

Also related to our higher than expected fourth quarter account generation were greater than expected fourth quarter operating costs associated with getting an additional 77,000 accounts up and running. While it will take a few quarters for these additional 77,000 accounts to generate profits for us, we had to incur some additional customer service and other operational costs associated with the addition of these accounts in the fourth quarter.

Not only were our fourth quarter customer service costs affected to some degree by this additional account growth, but we have also added rather significantly to our customer service personnel and efforts to lift our service levels and to enhance the experiences and satisfaction levels that our new and existing cardholders have with us.

Also, like many others who have already reported their fourth quarter results, we experienced bankruptcy charge-offs that exceeded our expectations going into the fourth quarter. We’re not concerned about this phenomenon, however, as it has resulted in lower delinquencies at December 31, 2005 and hints lower expected charge-offs into the earlier months of 2006.

Our belief is that much of the spike in fourth quarter bankruptcy-related charge-offs represent the acceleration into the fourth quarter of amounts that ultimately would have charged off in 2006. This belief is supported by the fact that we have seen a dramatic $3 million drop in bankruptcy charge-offs in January 2006 relative to January 2005, notwithstanding growth in our managed receivables of some $300 million between the beginning of 2005 and the end of 2006.

We’re also seeing a similar sized drop in bankruptcies in February relative to February of last year. Further, we made higher than expected investments associated with our testing of Internet-based micro-loans and experienced higher charge-offs associated with these tests than we had initially planned going into the fourth quarter.

Finally, we took advantage of the opportunity to raise an additional $300 million in capital in November through the convertible note debt markets, thereby resulting in higher interest costs than we had initially planned going into the fourth quarter.

Considering our profits and other equity-related transactions during the 2005 year, we were able to grow our book value per share to $15.67 as of December 31, 2005, up from $13.24 as of December 31, 2004.

Focusing now on our leverage and capital strength. We note that our equity to managed loans ratio remained relatively consistent from the end of 2004 to the end of 2005. At December 31, 2004, this ratio stood at 31.2%, which compares to 30.8% at December 31, 2005. We recognized that we have opportunities to safely add to our overall leverage, merely by deploying some of the cash that we have on our balance sheet associated with our recent capital markets transactions and by drawing down on unused securitization facilities to fund managed receivables growth and acquisition opportunities.

This brings us to a discussion of our overall liquidity position, which is better than it has ever been for us. For now, we have ample cash to fund receivables growth through our origination efforts and to fund other complimentary business and asset acquisitions for us. Through our existing securitization facilities, along with the collateral base within our originated portfolio master trust, we have the ability today to draw over $457 million to meet our liquidity needs. This is on top of the $228 million of unrestricted cash and cash equivalents that we have on our balance sheet at December 31, 2005.

Our available draw under our originated portfolio master trust securitization facilities is uncharacteristically high compared to prior quarters and periods due to a couple of extenuating circumstances. First, we’re growing receivables within our originating portfolio master trust as we add new accounts. This provides us with a larger capital base against which we can borrow. We also did our 2 convertible senior note issuances in May and November of 2005, which in the aggregate raised gross proceeds for us of $550 million. The proceeds from these convertible note issuances, coupled with cash of some $133 million received from our second quarter 2005 Encore transaction, allowed us to buy back $100 million of our stock in May 2005. And they also allow us to fund our cardholder purchases through our originated portfolio trust, which we did in 2005, thereby reducing draws against our originated portfolio master trust securitization facility, and they allow us also to fund significant growth in our lower-tier sub-prime credit card receivables.

To round out our discussion of liquidity, we should also note that while we have not yet obtained any financing against our lower-tier sub-prime credit card receivables, we expect to complete a transaction in the first quarter this year that will provide us with a $150 million initial amount of financing against this asset. As we now have sufficient history of performance data with respect to these receivables, we hope to secure additional financing against these lower-tier sub-prime credit card receivables as we continue to grow these receivable balances throughout the remainder of 2006 and beyond.

Focusing now on some of the financial operating and statistical data underlying the receivables that we managed, we begin with the fact that we managed approximately $2.4 billion in average managed receivables during the fourth quarter of 2005, up from $2.1 billion average in the fourth quarter of 2004. These managed receivables are comprised of receivables underlying our credit card securitizations as well as loan receivables and fee receivables, which are included in the non-securitized earning assets category on our balance sheet.

As one evaluates the economic performance of our managed receivables, it’s important to realize that the $2.4 billion in average managed receivables reflect only our economic interest in the receivables. This amount excludes our partners’ separate economic or minority interest in our acquired portfolios.

In comparing some of our key management receivable statistics between the fourth quarter of 2005 and the third quarter of 2005, the net interest margin was 22.4% in the fourth quarter of 2005, as compared to 23.2% during the third quarter of 2005. This decrease is due to expected seasonal effects of higher finance charge charge-offs and the bankruptcy spike that we have already discussed.

The same phenomenon impacted the adjusted charge-off rate, as it was 11.2% for the fourth quarter of 2005, compared to 7.8% in the third quarter of 2005, and 8.4% in the fourth quarter of 2004. On top of the bankruptcies issue and normal seasonal effects, the increase in adjusted charge-offs also extends from some of the Internet-based micro-loan tests that we ran in the fourth quarter of 2005, as well as from the maturing and seasoning of our most recently purchased portfolios for which a higher percentage of charge-offs are now attributable to undiscounted post-acquisition cardholder purchase activity for which there is no offsetting credit quality discount, as there was in the fourth quarter of 2004.

Moving forward, and as we previously mentioned, we estimate the charge-offs will be slightly down compared to historical rates in the first several months of 2006 and then gradually climb back to historical norms as the full forward effect of the October bankruptcy spike diminishes. Lower delinquencies can be seen in this 50-plus delinquency-based delinquency rate, which at December 31, 2005 stood at 9.3% compared to 10.4% as of December 31, 2004.

I should also discuss a phenomenon related to our lower-tier sub-prime credit card offering that is causing what we believe will be a fairly permanent shift upward in our operating ratio. A phenomenon that should not be interpreted as inefficiency within our cost structure or our cost control efforts. I already mentioned that we increased our customer service spending levels during the fourth quarter. We expect heightened customer service spending levels into 2006, associated with our efforts to enhance the experiences of our consumers and to increase their satisfaction levels. While these efforts will cause some permanent upward movement in the absolute dollars of customer spending and operation spending, the most significant expected shift upward in our operating ratio stems from the fact that our lower-tier sub-prime credit card receivables have significantly lower balances than our traditional near-prime credit card receivables offerings.

With lower receivables balances comprising our average managed receivables denominator used in our operating ratio computations, it is understandable that the number of customer service and collections touches will be much greater than they were for our traditional near-prime credit card receivables, because they are now a significantly greater number of customer accounts with low receivables balances that comprise our average managed receivables base.

As we continue to grow our lower-tier sub-prime credit card offering at a potentially faster rate than our growth for our traditional near-prime credit card offering, this phenomenon will become even more pronounced. We’re not troubled by this phenomenon, however, given the high level of profitability that we expect to continue to experience with our lower-tier sub-prime credit card receivables.

Considering all of the factors that we have presented in this call, we feel comfortable in noting that even though we don’t expect to close the Cardworks deal in the first quarter of 2006, we expect first quarter managed earnings in line with the consensus estimate of $0.93, as published prior to our earnings release yesterday afternoon. We expect to file our Form 10-K for 2005 within the next few weeks and there will be a lot of detail within our Form 10-K concerning our GAAP results of operations, various financial operating and statistical data in each of our business segments.

While our GAAP financial statements play an important role in the evaluation of our overall financial picture, we have heard the analysts and investor communities loud and clear with respect to the importance of managed earnings as a measure of our performance. Indeed, as we manage CompuCredit everyday, we look to manage earnings to the exclusion of our GAAP financial reports to define how we are doing and where we are heading. As such, we are comfortable with the decision we have made this quarter to begin publishing managed earnings data with appropriate reconciliation to GAAP financial measures. We continue to emphasize that we are focused on the identification and pursuit of an economically sound long-term investment, not on investments that will necessarily produce short-term GAAP earnings results.

We also fervently believe that there are attractive opportunities for meaningful and profitable organic growth for CompuCredit and for acquisitions and portfolios and businesses that compliment our existing platform for serving the needs of underserved and unbanked consumers. We feel very good about the amount of capital that we have already put to work in the fourth quarter, as well as about our potential to put more of our liquidity to work to further organic growth and acquisition activities throughout the remainder of 2006.

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 fourth quarter earnings call. With that, we’d be happy to address any questions that you may have.

[Operator instruction.] Moshe Orenbuch, Credit Suisse

J. Paul, one of the things that you had mentioned was higher bankruptcy losses in the fourth quarter and it kind of helping out in the early part of ’06. Can you kind of flush out a little more by how much that was higher than your expectations? And, also, if you could, just a little detail on the third to fourth quarter increase in expenses, a little more specifics around that.

Sure. On the bankruptcies front, we had basically estimated probably about $12.5 million or so of bankruptcy-related charge-offs of an increment coming into the fourth quarter. And we ended up a good $3 million or so in excess of that, to give you some color on that.

On the operational and the operating expenses, we mentioned marketing. We felt that was a very prudent way to spend money in the fourth quarter, given the environment that we saw. Obviously, that produced the good results for us in the way of account additions.

And on the operations and the customer service side of things, I think you really see, as I reflected in the comments, a significant effort on our part, given the fact that we’ve got such significant account growth and are working with so many customers with some of the smaller balance receivables to make sure that their experience is a positive one when they call into us. And I think if anybody is calling into our lines and chatting with our customer service folks, you don’t see the same experience that you see at a lot of places. In fact, you get a live operator on the phone very quickly these days with the additional amount of money we spent in the area.

Just to kind of follow up on that, I would assume that the revenue characteristics of those accounts also are different. Over what time do you kind of see some payback from that investment?

We think the payback is pretty quick on it, less than 18 months. Whereas a new traditional upper-tier account for us may be out to 18 to 24 months, we think that the lower-tier payback is sort of a -- it really happens fairly quickly. If we incur marketing dollars to generate and service costs associated with getting a new account up and running in the lower-tier, we certainly see profitability associated with that effort within a couple of quarters.

I’d also like to address, Moshe, on the bankruptcy front, we do believe, and J. Paul mentioned it and I mentioned it, that that, clearly, will result for us in lower bankruptcies during the first half of this year.

Sameer Gokhale, Bear Stearns

First of all, I would like to thank you all for providing managed basis earnings, because I think that probably will help investors, reduce some of the confusion for some investors within your managed and GAAP numbers. So, I want to thank you, first of all, for reporting those numbers.

I had a few questions. On the bankruptcy-related charge-offs, I just wanted to follow up, J. Paul. I think it said that you had expected charge-offs kind of in the range of the $12.5 million number, the [bankruptcy-related] charge-offs, in Q4. And I think the range you provided before was something like $10 to $15 million. And I think you said bankruptcies were actually $3 million higher than expected. So, is it basically bankruptcies contributed about $15.5 million to your charge-offs, which aren’t that much higher than your initial range? So, I just wanted to see if I was thinking about that correctly.

And then I wanted to just ask about your debt collections business. It seems like this quarter there was a small loss compared to a couple of million dollars income or losses for taxes. And last quarter, I think it was positive $2 million or -- so, I just wanted to get a sense for what might be happening there.

Okay. First off, on the bankruptcy, we basically -- we gave a range in our 10-Q, but as far as kind of our, the way we kind of manage the business and kind of estimated how we’re going to do coming into the fourth quarter, we kind of used the midpoint of that range, $12.5 million. So, when I say $3 million above that, it was $3 million above kind of what we estimated the quarter would look like using the midpoint of the range that we had disclosed in our SEC filing.

On the Jefferson Capital business, you mentioned, I guess, the segment data for that particular business?

That’s right.

Income before income taxes?

That’s right.

I think there’s nothing that you should glean from that that’s related to any ongoing phenomenon there. There were some allocations that we did of overhead to the various business lines in the fourth quarter, but there wasn’t a significant level of activity there. But there is nothing systemic there that is a concern.

I mean, is it more an issue of -- I think you still account for those purchases on a cost recovery method. So, is it more a case of you buy those portfolios and then you’re incurring expenses but not recording any revenue for some time? Is that essentially what’s going on there or --?

We’re continuing to buy the receivables out of our credit card trust and selling them to Encore. I know that we did have a couple of portfolios that were on the books for which we looked at taking an impairment charge in the fourth quarter. And that was one of the things that we did within that segment.

Okay, but the impairment charge would only be on receivables that are accounted for on the level yield method typically, right? You guys were using the cost recovery method. Unless it was the expectation that you would collect less than your purchase price on those receivables?

There are maybe a couple of isolated instances I think where we did take some impairment charges.

Okay. And then on your retail micro-loans, I think you talked about some of the plans to grow that business in 2006. I mean, my understanding is that in the, say the payday lending business, some of the companies that are the peers, they are publicly traded, when they’re growing, they seem to be -- those stores seem to generate some losses for the first few years until those stores kind of see them and you see a steady state. So, should we expect that retail micro-loan business to generate some losses in the next year as you grow that -- the number of store locations organically? Or how should we think about that?

When you look at some of the other comparables, I think their rate of growth over their store level has been much higher than what we’re looking at. We’re looking at going from a base of 500 and change stores and adding about 45 this year, so really less than a 10% growth in the stores. But we think the overall is going to still have a meaningful uptick in earnings for that segment with really less than a 10% growth in the stores. Our hope is that our growth, the organic growth out of that business, comes from additional products and services in the stores that we already have out there.

Okay, perfect. And then another question I have is just on your lower-tier accounts. I think, J. Paul, you mentioned that you want to try to use some financing on those receivables. Right now they are financed purely with equity. What would you expect, I mean, I’m assuming when you say financing you are talking about securitizations, what kind of advance rates do you typically expect for those types of assets? I think your advance rate with the Merrill Lynch facility is something like 92.5%. I’m assuming it will have a lower advance rate. Is that right?

Yeah, and we’re still kind of working out the final details on that, as we kind of negotiate this transaction. It’s going to be a tradeoff, obviously, between cost of funds and advanced rate, but we expect to get meaningful leverage against the asset.

And then on the Cardworks acquisition, I think you had previously mentioned that you expected that acquisition to contribute something like $0.50 to ’06 managed EPS. Was that with the expectation that it would close by the end of ’05 and then you changed to that sort of expectation or would you still stick with that $0.50 number?

I think that our expectation was that it would close either beginning of 2006 -- end of 2005, beginning of 2006. So, I would say that, yes, we would look and say if it closes sometime during the second quarter that you’d have a couple of months left of that earnings stream that you would have had. Of course, the earnings that they’re having will fill -- inure to our benefit, as I mentioned, in the form of the purchase price because earnings will remain within the Company, but they won’t be reported.

And the other thing I would add, too, just as a point of clarification, you guys probably saw the 8-K that we put out in December about Merrill Lynch joining us in that investment.

That’s right.

And they will own a 20% interest in the entity, so that would bring the $0.50 down to $0.40. And then, obviously, free up some capital for us to use in some other growth areas.

Carl Drake, SunTrust Robinson Humphrey

I wanted to ask about -- try to reconcile the permanent shift in your operating ratio with the $24 or $25 million increase in operating expenses from third quarter levels. Is the $12 million charitable contribution in there and maybe you can reconcile what we should expect in terms of a permanent shift up in that ratio.

Yes, it definitely is skewed upward by the $12 million, Carl. And then moving from there, I think we’re looking at the types of factors that I mentioned – customer service costs that -- additions that we’re making there; the fact that we’ll continue to influence the kind of a permanent shift in our operating ratio as we move forward, given that you are dealing with low receivables, balance of the number of big accounts -- big number of accounts with low receivables balances. So, for every, you say, $1 million of average managed receivables, we’re going to have a lot more touches of the consumer than we would for our traditional cardholder base with much larger balances. And that cost is expected to -- I think you are going to look at kind of high teens for that versus -- traditionally, we were kind of 15 to 17.5, 18. I think we would expect sort of 18 to 20 on a go-forward basis, based on the mix of our accounts that we now have on the books and looking out into the future what is likely to happen. Of course, if we were to do another large acquisition or something, that would alter the equation as well, but based on our current mix and our current marketing plan, I think we would look at sort of the 18 to 20 range.

Okay, that’s real helpful. Second, I think I heard you say $0.93. You were comfortable with that number on a managed basis for the first quarter. Is that correct?

That’s correct.

Okay. And that did include maybe a month and a half of Cardworks, so there is some, I guess, benefit in the quarter from originated card growth that’s spilling over in the first quarter. Is it more the -- I guess it’s a combination of lower adjusted charge-offs and better account growth?

Yes.

And then on just the adjusted charge-off levels for the first quarter, you mentioned it would be better. What about for overall expectations, ’06 versus ’05?

Right now, it’s hard to tell really what the charge-off is going to be at the end of the year, because so much of our consumer behavior is based on what’s going on in the economy, what’s going on in unemployment and the like. We’re pretty bullish on what it looks like right now, but we all know that the economy can change dramatically. And we feel very good about our customer base today – about their payment rates, about their -- what the delinquencies look like. So, right now we expect 2006 to look pretty good on that front.

So, if nothing changes in the economy, it would look better than ’05?

Yeah, I think so.

Okay. And then the last question is, in Cardworks, if the FDIC charter is not granted, there is a Plan B there. I was wondering if you could maybe comment on if there is any update there about potentially buying the servicing operation, the receivables, and bringing Merrill Lynch in to finance if you can’t pick up the deposits in the charter?

We, as you mentioned, Carl, we’ve got that availability. We are highly focused and are confident that we’re going to get there with the FDIC. We are doing -- really trying to make sure that we give them all the information they need to make a favorable decision on that front. And when we get to the point, if we ever do, where they say no, we’re not comfortable here, then we’ll move to the Plan B. We’re very confident that the businesses within Cardworks can make us a lot of money going forward as a standalone without a bank charter. But, obviously, the bank piece is helpful in a lot of endeavors moving forward and that’s the way they’ve operated their business and we think it makes sense to focus on getting that done rather than Plan B. But it’s clearly there and we know that it will be a moneymaker for us in Plan B as well as Plan A.

Okay, last question. Can you give us an update on the market for purchase portfolios from some of the larger credit card companies being consolidated and what the outlook might be for that or expectations?

I will tell you that we continue, as we have always done, to actively pursue and to talk with really all of the parties out there that we think might have an interest in divesting some of their portfolios. We are hopeful that some of them make that decision in the not distant future and we’ll come to you when we have a transaction to announce.

Joe Houck, Wachovia

J. Paul, I’m trying to get a little more color on the operating expense line. Do you have -- the $25 million lift in Q4, can you break that out between technologies and systems expense, which might be one time versus a higher base of operating expense just due to the higher customer service. I’m not sure if you can put too fine a point on it, but any direction you can give us in terms of the lift in Q4 would be helpful.

Yeah, I mean, there is one item that I guess comes to mind that would be helpful to you guys, and that’s we did in the fourth quarter of 2005 went live on a new data center that we built for operations. And while a lot of the costs associated with that effort were capitalized there were additional costs associated with actually running the data center and getting it up and running. We think it’s a very prudent investment for us to make over the long-term. It has also caused a fairly sizeable increase in depreciation expense for the IT portion of our operations that we’ll see on a go-forward basis. So, IT was certainly one of the areas. And, as David mentioned, as we continue to diversify our product offerings, we are spending a good bit of time and effort on the IT area to make sure that we’ve got systems that are robust and capable of meeting the demands of a diversified product line.

I guess in terms of getting back to the $0.93 number in Q1, account growth is going to help you get there. What’s the contribution for, perhaps, a rebound in net interest margin in your mind for Q1?

Certainly, charge-offs, to the extent the bankruptcy charge-offs are down, that flows through on our managed earnings statement, not only to our adjusted charge-off rate but to our net interest margin and to our other income ratio as well. Charge-offs are netted against the adjusted charge-off rate and our fee income and all of our managed statistics. So, that will flow through quite significantly to each of those line items without giving you specific numbers.

[Paul Plunk, Plunk Capital]

Some of us on the call are participating for the first time since the convert was done in November and I was wondering if you could give us some help with our modeling for ’06 earnings?

I think we’ve given some guidance on the first quarter, which is typically what we’ve done, have guided out at least one quarter or so. And we see a lot of opportunity in 2006. It’s a very dynamic environment for us with the capital that we have to invest and to go out more than one quarter probably doesn’t make a whole lot of sense at this stage.

But did you give one quarter out? I may have called in late.

Yes, we said that we expect to be in line with consensus estimate of $0.93.

[Larry Lufa], SAC Capital

Can you give a little bit of color on the auto business. I think you might have mentioned that some of the ramp up in expenses there, which you have been talking about for awhile, are coming to a conclusion and maybe just talk a little bit about the ramp up for loan growth there. And you mentioned maybe some other portfolios in that business that could potentially be for sale that you can now look at [Technical difficulty – no sound.]

-- point out that GMAC is going to sell half their business to someone or some group and the like and we think there are other auto portfolios that we’ve seen over the years that we had to pass on because we didn’t really have the right platform, even though we have a good understanding of that customer base.

Our hope in that business is to see a 20%-plus growth in the business that we’ve been in there during 2006. If something good comes along on the acquisition front, obviously, that would be higher than that, but as a business who’s operating long, we hope to have a 20% over sell growth in that business during 2006.

Can I ask a question on the capital? You had mentioned after the convert back in May you bought back some stock. Are there any other sort of capital plans on the calendar for ’06? Either issuances, like another convert, if you need, or buybacks? I mean, you do have a ton of capital. Is there anything that you are thinking about there?

Well, as I mentioned, Larry, the $150 million facility that we’re pursuing now against our lower-tier sub-prime portfolio. And that’s what’s currently planned, as we look at the current quarter. And, as you’ve mentioned, we do have a fair bit of capital to invest and I think, depending upon how we deploy that during the current year and the opportunities that become available to us, there very well could be additional capital that’s raised. Certainly, if there is a big credit card portfolio acquisition that we may have the opportunity to participate in, you could expect that we would have ABS financing against that facility, if one were to become available to us.

Okay. Another question on the acquisition front. Is there anything on the international scene that could be in the pipeline you guys are looking at that’s attractive?

Yeah, we have looked at some things over the last 12, 18 months in both -- some opportunities in Mexico as well as the U.K. and continue to evaluate those. So, there is a possibility there. We will go where we think there is a great opportunity to put our capital to work. So, you could potentially see something there, but I wouldn’t say that it’s imminent or likely or anything like that.

And my final question is with the closing of Cardworks, as you go through the process, in the regulator’s eyes, does Merrill Lynch bring anything to the table and do you think it makes it easier to get that deal done with their partnership?

Well, Merrill Lynch currently owns the biggest ILC in the state of Utah, so we think that having a partner that has been involved out there for a long period of time is probably helpful.

Thanks, guys, and thank you for the managed data.

Moshe Orenbuch, Credit Suisse

Just wanted to follow up. You talked about the increase in the operating ratio. Is there a related amount that we’re going to see either in margin or the fee income ratios that you didn’t think would correspond to that? I mean, could you kind of relay to that one?

Clearly, I mean, yeah, we see, as you know, most of our lower share products predominantly are a fee-based product. And as we continue to grow that, the trade off in the additional OpEx that we’ll be expending is well worth it, given the additional fee income that we expect.

Great, perfect.

Carl Drake, SunTrust Robinson Humphrey

Just a question about the other divisions or the [inaudible] operations and the turnaround of the other division. I think you mentioned it would be profitable in the second half of ’06, is that correct?

There are certain product lines that we believe will be profitable in the second half of 2006. And many of them will. But as for the whole division, I think we still need to see how things play out a few more months to see what the total picture looks like.

Okay, this is the division that reported a, was it $9 million or $7 million loss, something like that, for the quarter? Pre-tax. I think it’s called “Other” in your release.

Actually, it’s $13 million, right?

Oh, that’s right. Okay. It was $13 million. So, that division right there, you expect it to -- is that the peak loss we should expect for going forward and should that sort of work its way to breakeven throughout ’06?

As to the -- we would certainly hope that by the end of the quarter of ’06, we’re close to breakeven or turning profitable there on an overall basis. As to whether that is the highest loss that you will see, Carl, I’m not confident in saying that this will be the highest. We are still making some significant investments in the first quarter and we’re seeing a lot of things that we feel very good about. But --

There are some startup expenditures in there continuing. Okay, so by the end of ’06 you think it might breakeven or even positively be profitable.

We certainly feel that many of the products that we’re working on will be profitable. It’s simply a matter -- it’s somewhat too early in that, as we mentioned, we’re still doing some experimenting and testing and we may decide to ramp up some other [Technical difficulty.] attractive towards the end of ’06 and diversify into some other things that might cause the overall picture not to be a net profit while we do expect it to be profitable products within the segment. So, obviously, if we make those expenditures this year, we believe that the long-term prospects are excellent for it.

Right. Or we wouldn’t be making them.

We make that decision.

Sure. And then last question on Jefferson Capital. Do you expect that to turn around in the following quarters? It was traditionally providing in the $5 to $7 million pre-tax income level. You mentioned some impairment charges. What would you expect for Jefferson Capital going forward?

We expect it to be profitable going forward. In fact, we are going to take a look at the segment data that was provided in the earnings release and check out the expense allocations as we put forth our 10-K in the next couple of weeks there.

Ladies and gentlemen, this does conclude the Q&A portion of today’s conference. Thank you so much for your participation and you may now disconnect.