Atlanticus Holdings Corp (ATLC) 2006 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the Q1 2006, CompuCredit earnings conference call. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). I would now like to turn the presentation over to your host for today, Mr. Jay Putnam, Director of Investor Relations. Please proceed sir.

Thank you. Good afternoon and welcome to CompuCredit Corporation's first quarter 2006 earnings call. Before we get started, I would like to remind you that some of our comments today with the forward-looking statements. These forward-looking statements include all statements of our plans, beliefs, or expectations of future results or development, including our plans and expectations with regard to our marketing effort, our originated portfolio growth, the performance of our credit card portfolio including net interest margin and adjusted net charge-offs, growth plans and performance of our five business segments, our plans with respect new products, our expectations and plans with respect to the CardWorks acquisition and other acquisition-related activities, our capital raising plan, our earnings expectations, and general economic conditions.

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, you should read the forward-looking information section and the risk factors in our Form 10-Q for the quarter ended March 31, 2006. Risk factors can also be found in the investor relations section of our website at www.CompuCredit.com. You may also access our website in order to obtain a hard copy of the press release or financial statement or to listen to an archived version of this conference call.

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

Thank you Jay, and I thank everyone for joining us today. I will review our performance during the first quarter and give everyone an update on our business J. Paul Whitehead, our CFO, will discuss the financial metrics for the quarter in greater detail. After our prepared remarks, we will be glad to answer any questions that you may have.

We're very pleased to report GAAP earnings for the first quarter of $30.7 million or $0.61 per common share on a fully diluted basis. Last quarter, we begin to publish managed earnings, the non-GAAP measure that we and members of the investment community use to analyze our performance relative to others in the specialty finance industry. Our managed earnings for the first quarter were $54.8 million or $1.09 per common share on a fully diluted basis.

Our GAAP and managed earnings were up significantly from the fourth quarter of last year, a quarter adversely affected by the October 17th bankruptcy legislation effective date was accelerated millions of dollars of charge-offs into that quarter. The pull forward of bankruptcy filings into last year's fourth quarter caused historically low quarterly charge-off rates for the first quarter of this year. This was a major factor contributing to our better-than-expected first quarter results.

Our largest segments, Credit Cards, has experienced some strong tailwinds for most of the past few quarters and this past quarter was no exception. The competitive environment that we are seeing for credit cards offering SLC, but still rational in our opinion. We were extremely pleased by our new account additions as we added over 416,000 new credit cards accounts for the first quarter, a sign that our promotions are seen as a viable and desired option for our customer base.

We also are beginning to enjoy lower marketing costs for our per account through our market expansion platform which I will discuss in a few minutes. Our business continues to ride a wave of strong consumer confidence coupled with historically low credit quality concerns from the consumer. We are focused, however, on the fact that this current economic cycle will change and we and others eventually will be met with some less favorable economic conditions. While we cannot predict when the current cycle will soften, our goal is to be prepared and be able to adapt to the changing economic environment whenever that might be.

We remain hopeful that recent consolidations within the credit card industry will yield some portfolio purchasing activity for us. We also know from experience that soft economic cycles have presented significant portfolio purchasing opportunities for us, along with substantial earnings and growth for our business. To these ends, we have put ourselves in a liquidity position that should enable us to take act swiftly if and when good portfolio purchasing opportunities present themselves.

Moving away from credit cards, our Jefferson Capital debt buying subsidiary posted $5.2 million in pre-tax income for the first quarter, up from 2.3 million in the fourth quarter of last year. This segment is gaining momentum as it refocuses its efforts from buying and collecting traditional delinquency charge offs to its balance transfer program and its purchase and collection of Chapter 13 bankruptcies.

Additionally, Jefferson Capital is about to enter the second year of its five-year forward-flow agreement with Encore Capital Group, an agreement under which Jefferson Capital resells the more traditional delinquency charge-offs that it purchases from our credit card operations and securitization trusts to Encore at a fixed-price. We continue to be pleased with the deal Jefferson Capital reached with Encore last June and we're certainly counting on continued growth in success from Jefferson Capital in future quarters.

Our Auto Finance segment earned over $800,000 pre-tax during the first quarter. I'll offer the reminder that we completed the conversion from Wells Fargo's system of records to our own in February. Our new system is expected to support future growth through creating efficiencies and processing of new dealer relationships, new product offerings and potential portfolio acquisitions.

While the system of record conversion required the focus of resources traditionally assigned to operations and sales, which contributed to a decline in Auto Finance receivables and revenue during the first couple of months of the year, we did see an increase in receivables and revenue in March once we got these resources redeployed into their traditional roles. It is principally the net decline in receivables and revenues associated with the system convergence that contributed to the decline in profits in the first quarter relative to last year's quarterly level.

Our Auto Finance segment is now in the process of developing and releasing new financing products designed to complement its current product offerings. These new products could not be accommodated prior to the system convergence, but we now anticipate that these new products will be launched in stages during the second quarter of this year. In addition to these initiatives, the businesses in the process of forming strategic alliances with aftermarket product and service providers in an effort to cross sell to their existing customer base.

Turning now to our Retail Micro-Loans sector, as many of you are aware, in February we learned from our bank partner that the FDIC had effectively asked FDIC-insured financial institutions to discontinue offering cash advance products through servicing arrangements like the one we have used in Arkansas, Florida, North Carolina, and West Virginia. With our operations in these four states affected by the FDIC's guidelines, the challenges of converting the stores in to a direct lending model or closing operations led to a $10.5 million goodwill impairment charge and a $17 million pre-tax loss for the first quarter.

As we mentioned we would be doing in our 10-K for 2005, we have undergone a process of analyzing store closings, lease terminations, loan loss, goodwill, and other impairment costs associated with the February FDIC guidance. We have closed 15 stores in North Carolina and we anticipate some further store closings in Arkansas, Florida, and West Virginia. These store closings and other impairment charges are reflected in the first quarter loss.

Our stores in states not affected by FDIC's actions actually performed at or above expectations and we continue to evaluate alternatives to pursue profitable direct to consumer lending in the states that were affected by the FDIC's February action. As we move forward, we expect the Retail Micro-Loan segments to return to profitability and be a key part of our strategy to deliver products and services through retail storefronts.

We're still on the path of transforming these monoline Micro-Loan storefronts and (indiscernible) product financial service centers for our underserved and un-banked customers. Many of the alternative products we plan to offer in our stores and over the Internet are under development. And those development efforts are reflected within our Other segment. As one can see in our results from this segment, we continue to make investments in new product development.

We believe the startup ventures of this segment play an important role in our product diversification strategy and are vital to our long-term growth. The Other segment will run at a loss for the foreseeable future as we will continue our research and development efforts for new products and services.

However, we've already had some successes arising from our R&D spending and a couple of innovative credit and charge card offers. The offerings already generating managed earnings, but as their characteristics are more credit card like in nature, their revenues and associated costs will be reported within the Credit Cards segment rather than the Other segment for future quarters.

The credit card offerings I mentioned here have arisen from our efforts to develop an underwriting, servicing and collection platform that uses nontraditional processes to offer credit products directly to consumers. These techniques include the use of external databases other than the traditional credit bureaus, the application of proprietary scoring models builds off of internal and external data attributes, proprietary application processing and approval methods, and payment processing tools that are currently unique in the marketplace. We generally refer to these collective methods, models, and processes as our market expansion platform, and we consider them to be proprietary in nature.

To date, we have used the market expansion platform to launch the Purpose Advantage charge card product through the Discover network and the Imagine MasterCard credit card product, both of which are included in our Credit Cards segment. We have found that the market expansion platform has expanded the range of consumers that we can profitably approve for these card products beyond what we could traditionally approve using our credit bureau oriented underwriting model.

Customers acquired to date have lower average FICO scores than we see in our other credit cards products, a very limited credit bureau history or no credit bureau history of all. The market expansion platform has also allowed us to market our products on the Internet and through retail distribution at the point of sale, channels that until now have proven to be unsuccessful in generating large amounts of profitable credit card customers for us.

We intend to further utilize the market expansion platform to enter additional product lines including installment lending, retailer financing, auto lending, and consumer receivables factoring in the second and third quarters of this year. We also plan to use the market expansion platform in radio and television marketing channels for all of these products.

Another activity within our Other segment is the development of systems, marketing materials, and the infrastructure necessary to attract currently underserved or under-banked consumers to us so that we can use a centralized decision engine to determine which of our various credit products is appropriate for each consumer. Through this effort, we intend to engage in broad television and Internet advertising campaigns aimed at attracting consumers who may need credit or debit products. We also plan to partner with other providers of financial services and products and expect to earn fees through our referral of customers to these other providers.

Our Other segment also 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 complementary to the third party servicing platform that we expect to obtain upon completion of our CardWorks acquisition.

A significant portion of our Other segment's provision for loan losses relates to the loans and fees receivable underlying this new category of asset secured consumer finance receivables for us. For the time being, however, we plan to suspend loan originations within this asset class so that we can study the performance of these assets and our underwriting models for a few quarters to determine our further growth plans within this asset class.

To wrap up discussion on our Other segment, it really ties into our overall strategy which is to be able to efficiently deliver a wide array of attractive financial products to the 75 million or so underserved and under-banked consumers within our market. Sometime during the next 10 years, we believe there will be a company that is the leading provider of financial products and services to this consumer base. It is our goal to be that company and we have to experiment and innovate to get there.

Finally, I wanted to update everyone on the CardWorks acquisition. Unfortunately, the regulatory approval process has been slower than we initially planned and we cannot predict the timing or outcome of the regulators' consideration of our change of control application for the purchase of the Merit Bank Utah ILC owned by CardWorks. As you can see from recent 8Ks we have filed, we have extended the purchase agreement a couple of times. We continue to have discussions with CardWorks and we remain hopeful the deal will close sometime in the next few months.

In summary, I am very pleased with our current position and our first quarter results. We have a tremendous start to 2006 and we look forward to continuing our momentum for the rest of the year and beyond as we focus on long-term profitability and becoming that premier financial services provider to the 75 million or so underserved and under-banked consumers in the country. Our organic growth in the credit card business has been and continues to be very strong and we continue to prudently invest in diversification strategies for the long run.

I will now turn it over to J. Paul for his more detailed review of our financial performance during the quarter.

Thank you, David. To recap our first quarter results, we reported managed earnings of $54.8 million or $1.09 per common share on a fully diluted basis and GAAP earnings of $30.7 million or [$0.61] per common share on a fully diluted basis. At the end of the first quarter, our book value per share increased to $16.29 cents, up from $15.67 at December 31st of last year. Our equity to managed loans ratio also grew during the first quarter from 30.8% at the close of last year's fourth quarter to 31.8% at the close of the first quarter.

Our liquidity levels remained at all-time highs as we had $144.3 million in unrestricted cash on our balance sheet as of March 31st, 2006. Coupled with cash available draws from our securitization and structured finance facilities, we have over $650 million at our disposal to use for acquisitions and ongoing operations.

Our 650 million plus in available liquidity includes the funds available to us from a new $150 million financing arrangement we secured in March against are largely fee-based credit card offering to consumers at the lower end of the FICO scoring range. In the past, this offering has generated substantial returns for us with no leverage, but we're able to establish financing at attractive terms to provide yet another funding source for us.

To round on our discussion of liquidity, one of the lessons we learned from the last economic downcycle was that the best time to raise liquidity is during times when we don't necessarily need the funds rather than trying to obtain new sources of capital when we readily require it. Thus we have successfully completed our goal of not only diversifying our funding structures through our 2005 convertible debt offerings and other structured finance and securitization transaction, but we have also proactively taken advantage of obtaining sources of capital at a time we feel there are attractive terms available to us.

As we are actively exploring new acquisition opportunities, we will continue to explore new sources of capital to facilitate our acquisition goals and capital needs. And if market conditions are right for us, we may leverage other assets, restructured finance or securitization transaction.

Turning back to the financial operating and statistical data associated with the receivables that we manage, our average managed receivables increased from $2.4 billion in last year's fourth quarter to $2.5 billion in our first quarter. Our originated account growth fueled our net growth in average managed receivables levels during the first quarter. Throughout the balance of this year, we likewise expect to see further net growth in our average managed receivables levels.

To recap some of the key first quarter managed loans statistics from our release this afternoon, we experienced a 25% net interest margin versus 22.4% of last year's fourth quarter and 20.8% in last year's first quarter. A net charge-off rate of 8.5% versus 13.4% of last year's fourth quarter and 9.2% of last year's first quarter. And an unadjusted charge-offs rate of 7.1% versus 11.2% in last year's fourth quarter and 6.9% of last year's first quarter.

Lower charge-offs of finance charges and late fees accounted for most of the first quarter 2006 improvement in our net interest margin, although some of the improvement between the first quarter of 2005 and the first quarter of 2006 relates to the capital that we raised during 2005. Because of our excess liquidity, we didn't have any draws against our originated portfolio conduit or variable funding note facilities during the first quarter of 2006.

As such, portfolio-specific debt balances, the interest cost on which offset our net interest margin, were much lower in the first quarter of 2006 relative to the first quarter of 2005. Also reflected in part the full forward effects of bankruptcy-related charge-offs into the fourth quarter of last year. Our adjusted charge-off rate was down to 7.1% in the first quarter compared to 11.2% in last year's fourth quarter. With our significantly reduced first quarter of 2006 charge-offs, we almost rivaled our first quarter of 2005 adjusted charge-off rate of 6.9% which reflected the significantly favorable effects of acquisitions during and just prior to the beginning of that quarter.

Our 60-day plus delinquency rate increased from 9.3% at December 31st, 2005 to 10.6% March 31st, 2006. There are three things to focus on here. First, the acceleration of bankruptcies caused the year-end delinquency rate to be artificially low, so you're starting from a low point. Second, some of the 1.4 million accounts we added in 2005 are beginning to mature in season and we are now seeing the effects of this maturation of accounts in our delinquency statistics.

Third, as the mix of our accounts has shifted somewhat to now include more receivables associated with our largely fee-based offering to consumers at the lower end of the FICO scoring range, we expect some movement upward in our overall delinquency baseline. We're not troubled by this, however, based on the relative returns that this product line offers for us.

Looking forward somewhat, barring any material portfolio acquisitions, we expect to see gross charge-off rates increase throughout the year. As we continue to grow originations for our largely fee-based offering to consumers at the lower end of the FICO scoring systems, we do so knowing the default rates on those accounts will likely be greater than those experiences are near prime offerings. Here again, however, the returns on that product are such that we can absorb higher default rates and credit losses and still achieve our desired returns.

Higher gross charge-off rates are expected to put some negative pressure on our net interest margin and other income ratio. Coupled with the fact that our largely fee-based credit cards offering to consumers at the lower end of the FICO scoring system bears a lower APR than most of our near prime offerings, we expect our net interest margin to fall throughout the year with the growth of receivables we expect underlying this product offering.

Notwithstanding the negative pressure that high gross charge-off rates will place on our other income ratio, we expect enough growth from our largely fee-based credit card offering to consumers at the end of the lower FICO scoring based system and others fee generating product offers to produce another income ratio for the next three quarters that will average even higher than it averaged in the first quarter this year. While we expect some variability in the other income ratio with a lower second quarter ratio than in the first quarter, we do expect that the average for the next three quarters will exceed our first quarter ratio.

Growth in our largely fee based credit cards offering to consumers at the lower in the FICO scoring system will also cause increases in our net charge-off rate and our adjusted charge-off rate, but not as much as one might expect. Principal balances for this offering are much lower as a percentage of total balances than in our more traditional near prime products, and this serves to keep the net charge-off rate for this product line fairly consistent with and only slightly higher than for our more traditional near prime products.

We also expect to see continued convergence of our net charge-off ratios and adjusted charge-off ratios throughout the year as we have not acquired a credit card portfolio since January of last year. With each month that passes since our last portfolio acquisitions, the percentage of our managed receivables that is represented by post acquisition cardholder purchases that we have funded dollar for dollar continues to increase.

Having noted all of the above factors, we are extremely pleased with the credit quality that we're seeing and the economic environment in which we are operating. To best summarize how we see things, the increases that we see our in delinquencies and that we expect our charge-off rates is not a comment on the health of the U.S. consumer or macro delinquency trends. Rather, our expectations have more to do with changes in the mix of our managed receivables and an anticipated return to the more normalized bankruptcy levels that we were experiencing prior to the fourth quarter of last year.

Our first quarter marketing expense increased 48% over last year's first quarter, reflecting our optimism and growth plans for our credit card originations. At this point, we expect marketing expenses in the second quarter through the fourth quarters of this year similar to our level of spending in the first quarter. We will increase or decrease spending, however, depending on any shifts that we may see in the marketplace.

While the uncertainty of the timing of the pending CardWorks acquisition makes it difficult for us to provide a managed earnings estimate for the remainder of the year, we are comfortable in noting that even without the effects of any CardWorks contribution in the second quarter, we expect second quarter managed earnings to come in in the mid-$0.90 per share range.

We discussed within today's Form 10-Q filing all of the components of our first quarter GAAP income and separate discussions for each of our five business segments. I encourage you to review that filing for further background on the commentary that we're making in this call. With that, I would like to conclude by saying thank you to everyone for joining the call today and I would like to turn the call over to the operator, and open the floor to any questions you might have.

(OPERATOR INSTRUCTIONS). Moshe Orenbuch, Credit Suisse First Boston.

I was wondering if you could talk a little bit about the potential to effect the CardWorks acquisition without the bank, something that there's been some discussion about and whether that something that you would consider so that you don't pass that deadline if you don't get approval.

Well I think that as we've outlined before, there are -- there is some ability to buy certain assets, the portfolio and the like if the parties want to move forward in that effort. Our belief, based on numerous meetings with the regulatory people and the like is that we will get there with an approval from the banking regulators. And we think that the -- CardWorks as a Company is a fair amount more valuable to us with a bank charter with the ILC charter than without, so we will probably be more patience rather than less patient working with the regulatory people to try to get over that hurdle rather than trying to effect a transaction or assets that did not include the bank charter.

Okay. On a separate question, you mentioned that the $10.5 million goodwill write down and other costs related to store closing, over what period of time would those go away and return to profitability in that segment?

The accrual -- the various accruals that we've made, we included some loan loss reserves relative to the loans in the bank model states if you will. We included accruals for lease termination costs for store closing costs. As far as when the segment will return to profitability, we certainly anticipate and hope that will happen very soon, ideally, as soon as the next quarter.

We do have, though, some lingering costs that will continue to incur in North Carolina as we're in the process of trying to get licensed in North Carolina to (indiscernible) under the North Carolina regulatory regime. Until that happens, the amount of interest and fees that we're able to charge is fairly nominal and doesn't provide for profitability in the state of North Carolina.

And we're really in North Carolina and continuing there with hopes of being able to pursue a legislative solution that would allow us to make some decent returns in the state of North Carolina. So some of those variables will impact the speed with which certainly those operations can turnaround and get profitable, but the rest of the business is doing well in the non-bank model states and we're hopeful that we'll be able to carry it through to profitability very soon after the close of this quarter.

The bulk of those costs were kind of reserves taken in the quarter that really (inaudible).

Right.

Sameer Gokhale, Bear Stearns.

On this new financing facility that you locked in for your lower tier cards, I didn't -- can't recall if you mentioned what your advanced rate was on that facility.

No, we didn't. I guess I'm comfortable just telling you that it's kind of market advanced rate that you would expect for any securitization facility through kind of an investment-grade type of tranche of advanced rate. So as I mentioned before, a lot of our balance here in this particular portfolio consists of finance charges and fees, but the financing structure that we reached reaches a more traditional conclusion as to advanced rate as a percentage of principal. And it's right in line with what we might expect to see or you might expect to see in other credit card lending arrangements.

So would you feel comfortable with a range of 80 to 90%?

Yes.

Okay. And then, the other question was on -- for Jefferson Capital, the change in the bankruptcy legislation, the market for Chapter 13 paper should double or triple potentially. But just comparing your acquisitions in that business from last quarter to this quarter, there does not seem to be much of an increase. Can talk about that a little bit in your purchases of Chapter 13 paper?

Yes, we do believe that the change in the bankruptcy law is going to have long-term positive impacts on that. Some of these things though are forward-flow arrangements so they -- you won't necessarily see a big spike all of a sudden. Our hope is that -- and some of these had -- as we are in the process of growing that business, we hope to be in a better position to make attractive bids on forward-flow arrangements and individual pools that might be marketed in the future as well.

We feel good about how that business has grown today and hope to increase the growth of that business moving forward. As you point out, there will clearly more -- or our belief is there will clearly be more assets to purchase out in the market.

Okay thanks. And my last question was J. Paul, you mentioned something about the other income ratio and the trend is that the other income ratio should be higher for the next three quarters than it was in Q1 and I just -- I didn't get some of the explanation there. I just looked at the trend in the other income ratio, your cards business seems to be trending up pretty steadily, but just wondering what the effect of the bankruptcy legislation may have been in the fourth quarter and in Q1.

Yes, I would summarize it by saying what I tried to provide information on was that for the rest of the year, if you take all three quarters on average basis, we would anticipate having a higher other income ratio for the next three quarters on an average basis. In the second quarter this year, we do expect to see some softening of that ratio relative to the first quarter.

And essentially what you have there is the -- the amount of growth we're having in our lower tier product offering is driving a good bit of fee income in that fee income category, and the amount of income that it's driving is significant enough to offset the higher charge-offs that we have. We do have charge-offs that offset the other income ratio, but the growth is significant enough to offset the charge-offs.

On our lower tier product offering, there wasn't as much bankruptcy variability relative to our other credit cards portfolios. That's not a major factor if you look at last quarter versus this quarter.

Okay. That is very helpful. Great quarter guys.

John Hecht, JMP Securities.

Thanks for taking questions. Real quick, I just want to clarify in the other segment when you were talking about the market expansion platform, it sounds like the Purpose and Imagine products are going to be moving in the second quarter to the Credit Cards segment and other products you are going to put on hold us to analyze the seasoning of them. Is that an accurate take away from that discussion?

Let me back up for a little bit here. Just on the Purpose Advantage card and on the Imagine card, those results have actually been in the Credit Cards segment. We had a little bit in the fourth quarter of last year and we had -- we really kicked off the program with a good bit of growth in the first quarter, so those results both costs and income are in the numbers -- the segment table numbers for the Credit Cards segment in the first quarter of this year.

As we begin to provide comparable data in later quarters of this year where we look at 2005 quarters versus -- same quarter versus same quarter, we will make appropriate reclassifications to get the expense associated with those activities into the Credit Cards segment in the later quarters of 2005. There really wasn't any expense to speak of in the first quarter relative to the consumer finance receivables secured by jet skis and all-terrain vehicles and various sport utility vehicles -- not cars, but sport type of vehicles. So we invested in a pool of that stuff and had an underwriting model we had developed, and really we are going to kind of sit on the sidelines for the next probably four to six months or so, see how those vintages perform before we determine the level of ramp up that we'll be providing with respect to that particular asset class.

Okay, but generally secured loans by some type of object?

Some type of object, yes; motorcycles, et cetera.

And then can you tell us was there any change in the sort of on the margin in the average FICO score of the new revenue accounts?

I think it's been inconsistent with where we've been in the last several quarters.

And then the last question would be in the micro lending segment, my phone blanked out; I assume the full goodwill charge was associated with that segment. And the second question with this is that is the run rate we saw in the first quarter revenues in that segment a good kind of first quarter run rate to assume, or was some of the FDIC changes being encountered during the quarter?

Two points; number one, the goodwill impairment charge is exclusively related to our Retail Micro-Loans segment. Second point is I think the revenue growth rate that you're seeing in the first quarter is not something I would assume is indicative as we move forward, in that we certainly have expansion plans that are beyond the bank model states. So I think what you saw probably in the first quarter is a good bit of contraction in our bank model revenues which, as you move forward into future quarters we would expect to be replaced with fairly high-growth associated with new product offerings and in new venues and new states in non-bank model states and jurisdictions.

Thank you for taking very much for taking my questions.

Carl Drake, SunTrust Robinson Humphrey.

Good afternoon. I was wondering if you could provide -- I am trying to reconcile the increase in the provision expense along with the mix shift in the business to lower FICO assets in some of these alternative assets from a credit quality prospective. Could you provide a little more color on the magnitude of the increase expected in the adjusted charge-off ratio throughout the year, or do you still see that coming in below 2005 levels on an all-in basis?

The adjusted charge-off ratio for the year, as I said, just to reiterate, it will -- we do see our adjusted charge-off rate kind of rising throughout the year relative -- and to end up higher than it was in 2005. And Carl, the reason for that is predominantly, as I mentioned before, the mix change associated with the fact that we have a greater percentage of receivables that are comprised of our lower tier more fee-based credit card offering. And so we do expect to see some changes there.

The other factor and probably a more significant factor on the adjusted charge-off rate is what I mentioned with respect our purchase portfolios. It's a while since we have done a purchase portfolio, and what happens there is we've got credit quality discounts that offset the net charge-off rate and coming down to your adjusted charge-off rate on those portfolios.

And for each day that passes, as far as those purchase portfolios go, and larger percentage of the portfolio balances that we have consist of cardholder purchases that we funded without the benefit of a discount, dollar for dollar. So that narrows the gap between our adjusted charge operate and our net charge operate and brings our adjusted charge-off rate up closer to what our net charge-off rate is for -- which is a base amount concept for our business.

So it's more a reflection of the mix shift and not any change in our outlook for the strength of the consumer?

Actually it's two different components of mix shift, the lower tier product plus the mix shift away from portfolios that we purchased at a discount towards cardholder purchases that we funded dollar for dollar with our own dollars.

But the other part of your question is we are -- pleased with the performance on the charge-offs of our organic portfolios and our purchase portfolios right now. And we have seen nothing in the early bucket delinquencies that leads us to believe the rest of the year won't look fairly favorable for us as well.

Thank you. I have a couple of other questions in terms of the organic growth. How was the growth that you're seeing in the near prime or the 600 plus FICO products that you offer?

Are you asking for just relative growth in our near prime versus the lower tier? Is that --

Yes, just in terms of the whole picture I guess, the lower FICO is still less competitive -- I was wondering if you could comment on the near prime product and --

We are in the 600 plus FICO band. We are, especially in the upper 600, the other upper half of that, we have seen a little more competition. We're still pretty pleased though with the offerings that are being accepted by our customer base in that market and are still enthused about growing that market for the remainder of the year as well.

The last question I have on the auto -- business there, it looked like you had -- you mentioned there was some recovery in March, but do you foresee getting back to the levels that you're reporting [out] of division in the second and third quarters of last year or do you see that potentially being some upside on those numbers?

We certainly see it getting to those levels hopefully real soon and then we certainly are expecting to see significant upside over the next couple of years in that particular business segment.

Okay great. Thank you. Good quarter.

Joel Houck, Wachovia Securities.

Thanks and good evening. The net interest margin guidance, I guess I understand it directionally. Can you maybe talk about it on an annual basis -- I think it was like 22.3 in '05. Do you -- I was assume you would see it higher in '06 given the mix shift, but how much higher if you can kind of quantify that within a range.

Actually, the mix shift probably hurts us on the net interest margin from the perspective that our lower tier product offering has a lower APR than our other products. But there are factors that, as David mentioned, we're very pleased with the credit quality of what we're seeing and the relative level of finance charge and late fee charge-offs. That coupled with the fact that we, given our current cash position if we felt the benefit of the first quarter of -- in this first quarter of not having a lot of interest costs offsetting our net interest margin because we didn't really draw on the portfolio specific debt within our originated portfolio master trust.

All of that is a contributing to so enhanced results over what we saw last year. And I guess at this point, I would just say that we are looking at something in the order of an improvement over last year's net interest margin for the year of say 500 basis points or so.

Just doing the math here, that would put the margin about 27 which doesn't -- math doesn't work relative to 25 in Q1. Did I misinterpret that?

(multiple speakers) 50 basis points.

Okay. That makes more --

(multiple speakers) would be nice.

That makes more sense. Thanks guys.

(OPERATOR INSTRUCTIONS). Barry Cohen, Merrill Lynch.

Thanks for taking the call. Just I was wondering, help me understand a little bit better. You guys generally think that your margins are going to be better, you see organic growth, your provision and your loss rates are going to pick up over the course of the year, but nothing out of hand. You had expenses in the quarter which won't necessarily be recurring which were fairly substantial. And yet you're on an incremental sequential basis suggesting that EPS is going to be lower than the purported number this quarter. Can you kind of walk us through a little bit what your thought process is and what we should be thinking about?

I think you start out with, as we have indicated, we think that there was a fair amount of the bankruptcy suppression for the first quarter over the fourth quarter of last year. I think that's a big piece of it. I think that we are looking at some pretty good marketing expenditure in the second quarter as we try to grow this business base. And candidly, we think that a mid 90s number is a pretty good number for us as well. So we don't give that guidance with any trepidation or not going feeling good. We think that's a good number.

I wasn't complaining. I was just trying to understand the math.

Sameer Gokhale, Bear Stearns.

Just a quick follow-up on the new accounts you added this quarter, can you breakdown for us the percentage of that -- of those accounts that were lower tier versus the upper tiers, prime?

We've never broken that out. And we like the balance we have now and we are pleased with the growth in both the lower tier and the upper tier, but we're not prepared to start reporting be split in those.

Okay. Fair enough. And just another question was on the -- I think J. Paul you mentioned the benefit to the margin from using less of your -- or tapping into your securitization facilities to a lesser extent and that had some benefit to net interest margin. Can you quantify that benefit to the margin, say compared on a year-over-year basis?

I think one way of just kind of probably estimating or sizing it up might be to compare your net interest margin in say the first quarter of last year with kind of the December '05 net interest margin. We didn't have debt financing in that fourth quarter and we did in the first quarter -- we did in the first quarter of '05. It's -- a couple hundred basis points is probably a reasonable estimate.

We got term securitization facilities that are outstanding that support a good piece of the numbers within our originated portfolio master trust. But it's simply that we haven't drawn down on any of the conduits of VFNs, and that gives you a little bit of lift in your net interest margin in the first quarter this year. And as expected, throughout the certainly most of the rest of the year, based on the liquidity that we have available and kind of timing as to when we might be able to put that to work.

Okay thank you.

Jordan Hymowitz, Philadelphia Financial.

Help me understand a couple of things please. In the other income the loss of 10.8 million, does that run through the managed number?

I am not sure I am following the question; of the other segment?

I am sorry. The other segment of the 10.8 million loss, does that run through the managed number?

Yes, both managed and GAAP. There are very small differences between managed and GAAP for the other segment we have.

And of that 10.8 million, how much would you say are investments in new business per se as opposed to core business enhancements for lack of a better term?

I would say substantially all the activity is related to --

The overwhelming majority.

Okay, that's what I figured. So to speak this is like R&D that is generating expenses now but no revenues.

I would think that is a good way to look at it.

Second, the auto finance business -- you mentioned there was a onetime effect in there this quarter but objectively when you look at auto finance per se, that should be a 3% [roam] of business that your size and profitability. Would that be correct? Maybe even more?

I would say we would look for it to be better than that.

Fine. Okay. So that number is (indiscernible) in the quarter. And in your Retail Micro-Loans, that 17 million -- (indiscernible) that also all went to -- because North Carolina, that also went to the managed, correct?

It was -- we actually have four stores or four states that were affected by the FDIC, not just North Carolina, although North Carolina was our largest one, but yes, those numbers would have --

Okay. So who knows what happens next quarter, but the 17 million loss figure a 3% [roman] auto finance and all the other per se, if you were just looking at your core run rate operation in the quarter should all be kind of backed out, correct? You want to back that out hypothetically?

One could.

Okay. I just want to make sure understanding the current earnings power of the actual company. And if CardWorks, we should probably not assume anything for the next quarter, correct?

We have given up on trying to predict just when the regulatory agencies will act. We have done everything we can to provide them everything they need in as quick timeframe as we could, and hope that some of the things with Wal-Mart and the like getting behind -- enable them to make a decision here pretty quickly. But we're not sure when that is going to happen.

One more follow-up if I could. Your operating ratio of 18.5, that is going to include that 10 million loss and that 17 million loss, correct?

When you say the 10 million or loss, you are referring to the goodwill impairment?

No, no, I'm sorry. The 10 million other income profits as well as the -- 10.8 million other income pre-tax loss as well as the 17 million write-off from goodwill. Actually, the write-off was more than that, but my -- both numbers are in the operating ratio this quarter of 18.5, correct?

Well, the expense that comprises -- yes on $17 million or most of that, and on the other segments expense, you got -- it is net of the revenue, so the revenue offset is not in your operating ratio, so there's a marginally higher number that hits your operating ratio by backing out the $500,000 or so of revenue in the other segment and --

Fine, I understand. So at the very least, you said the -- unless I misunderstood you, but the operating ratio could be up next quarter. How possibly, unless you have another major write-off in another segment could the operating ratio could be off when at the very least you're going to get back almost 20 million in a goodwill write-off?

No, I don't -- if we communicated that, we certainly did not intend to. That is not correct. My commentary had to do with the other income ratio being up on an average basis over the next three quarters, but I don't believe I spoke as to the operating ratio.

Okay, so that operating ratio which had been close to the 15% before this quarter and last year, would that be a reasonable run rate for that this year as well?

No, for the factors and we discussed in last year's call that we did. As -- here again with the mix change of receivables that we're having towards more lower balance receivables with our lower tier product offering, the expenses to service that as a percentage of average managed receivables go up, so you'll see the operating ratio rise relative to 2005 levels.

So could you give sort of a range of like 14, 15 was the run rate, percent, what type of run rate should we be thinking about the next three quarters?

I think you could look at the higher teens.

Okay. Somewhere between 16 and 17 so to speak?

I would probably go slightly north of that.

Okay. Thank you.

Ladies and gentlemen, this concludes our Q&A session. I would now like to turn the presentation back over to Mr. Jay Putnam for closing remarks.

Thanks everybody for joining us today. Please feel free to call me if you have additional questions and we'll see you next quarter.

Ladies and gentlemen, I'd like to thank you for your participation in the first quarter 2006 CompuCredit earnings conference call. This now concludes presentation. You may now disconnect and have a wonderful day.