Atlanticus Holdings Corp (ATLC) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2006 CompuCredit earnings conference call. My name is Jeff and I will be your coordinator for today. [Operator Instructions] I would now like to turn the call over to Mr. Jay Putnam. Please proceed, sir.

Good afternoon, and welcome to CompuCredit Corporation's second quarter 2006 earnings call.

Before we get started, I would like to remind you today that some of our comments today will be forward-looking statements. These forward-looking statements include all statements of our plans, beliefs or expectations of future results or development, including our plans and expectations with regard to our marketing efforts, the performance of our credit card portfolio, including net interest margin, other income ratios, operating ratio, and adjusted net charge-off, [birth] plans and performance of our five business segments, our plans with respect to new products, our expectations and plans with respect to the CardWorks acquisition and other acquisition-related activities, our plans with respect to share repurchases and other uses of cash, our expectations concerning the regulatory landscape in which we operate, 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 June 30, 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our website to obtain a hard copy of our earnings press release, financial statements or SEC filings or to listen to an archived version of this conference call.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 thank you all for joining on our call this afternoon. Today we will review our performance for the second quarter and provide an update on our various business lines. J. Paul Whitehead, our CFO, is with me and will discuss the financial metrics for the quarter in greater detail. After our prepared remarks, we'll be glad to answer any questions you may have.

We're very pleased to report GAAP earnings for the second quarter of $28.3 million or $0.56 per share. On a managed basis, we reported net income of $48.8 million, or $0.97 per share, which was slightly ahead of the guidance we gave in our last earnings call.

In last year's second quarter, we reported GAAP earnings of $66.5 million, or $1.29 per share, and on a managed basis, we reported net income of $80.6 million, or $1.56 per share. Last year's second quarter managed and GAAP results included $44.2 million, or $0.86 per share of gain associated with our sale of approximately $2.9 billion in face amount of previously charged-off receivables to Encore Capital Group. So we are pleased with our fundamental earnings growth over last year's second quarter.

Overall, we are very pleased with the second quarter across all of our segments. Our credit card segment had another great quarter in which our marketing efforts produced gross additions of 433,000 new accounts. Our originated credit card receivables now account for roughly three-quarters of our credit card managed receivables.

As we have said in the past, generally when it's a good time to originate cards, as it has been the past few quarters, the opportunities to purchase credit card portfolios are not as great. While that has held true in the past few quarters, we are pleased with our recent ability to organically grow through our counter-origination efforts without having to rely on purchase portfolios for earnings growth.

By its nature, portfolio purchasing is somewhat of an opportunistic endeavor, an endeavor with which we have had a lot of success in the past. While currently we are not seeing a softening of credit within the under-served sector, we are well positioned from a capital perspective to purchase additional credit card portfolios if there is a downturn or if otherwise there are deals that make sense to us.

Some of you recently may have read about our second quarter settlement with the New York Attorney General to resolve an investigation into some of our marketing and other materials and our servicing and collection practices. While we are highly confident that our marketing materials, our policies and procedures and our collection practices are substantially compliant with all laws and jurisdictions where we operate, including within the state of New York, we thought that it was the best to go ahead and settle this investigation for the same reason a company settles other types of issues. It made good economic sense, all things considered.

You also may have read about an FDIC investigation of Columbus Bank and Trust, CB&T, our largest issuing partner, as it relates to our credit card policies, practices and procedures. Regulatory reviews like those of the New York AG and the FDIC are common, given the nature of our business, that is, providing credit to under-served and unbanked consumers.

While we have a philosophy of full cooperation with regulators and their reviews of our business and while the standards imposed on our business by applicable law and the regulators are at times subjective, we strongly believe that we have the most comprehensive legal and other diligence processes within the industry to ensure our compliance with applicable law. As the FDIC is the primary regulator for CB&T, we will work closely with our partner in providing the FDIC with any information that they request about our program.

This notwithstanding, it is possible that, as part of any review by regulators from time to time, they will object to our marketing, servicing and collection practices, and we can't really provide any assurance to you that we won't bear financial consequences based on these reviews and any changes we may make to address their concerns.

Turning from credit cards to other segments, our Jefferson Capital subsidiary had a great quarter. In second quarter, pre-tax net income grew over 26% from the first quarter of this year to $6.6 million. This comparison to the prior quarter makes a lot more sense than a comparison to the second quarter of last year, as we had our bulk sale to Encore done in the second quarter of last year.

We expect Jefferson Capital to continue its acquisition and collection of Chapter 13 bankruptcies and its balanced transfer program to fuel further growth throughout 2006 and beyond. Also, while we are not seeing these market conditions yet, we always have the ability to return to purchasing and collecting on a broader array of charged-off accounts if the pricing and returns that we want come back to levels that we are comfortable with.

We also are pleased with the results of our auto finance unit, Car Financial. At $3.2 million in pre-tax earnings and with a now growing base of managed receivables, Car Financial turned in its best quarter since our acquisition of that unit. With the transition from its Legacy IT systems behind it, the Car Financial team has been able to dedicate its resources to improving efficiencies and developing new products and services.

Two new products were introduced by Car Financial in the second quarter, and a third product already has been introduced just last week. Our efforts are beginning to pay off, and we expect this unit to continue to grow and contribute in a meaningful way in quarters to come.

Now, let me spend a few moments on the performance of our retail micro-loan segment. During the second quarter, our retail micro-loan segment completed the process of converting our entire network of branches to a common information technology platform capable of supporting multiple products. Reflecting our strategy to convert our mono-line retail micro-loan branches into full service neighborhood financial centers, we expect our suite of products to include auto insurance, debit cards, credit cards, check cashing, money transfer, money order, amortizing installment loans and auto loans, in addition to cash advance or deferred presentment transactions.

In connection with the system conversion required to support these multiple products, our retail micro-loan segment incurred additional travel, training and other operating expenses during both the first and second quarters of 2006. We did succeed, however, in opening 26 De Novo branch locations during the second quarter, including 19 full service neighborhood financial centers in Texas and one in Nevada.

As of June 30, 2006, our micro-loan subsidiaries operated a total of 512 financial service centers in 18 states. Storefront locations openings in Texas and Nevada were off-set by store closings in North Carolina and West Virginia.

As you will recall, prior to the effective date of recently published FDIC guidance, we had served as a processing and servicing agent in North Carolina, West Virginia, Florida and Arkansas for an FDIC-insured bank. Our second quarter financial statements reflect the fact that we plan to exit all of our North Carolina and West Virginia operations by the end of the third quarter of this year.

In Arkansas, we have adopted an alternative lending model that we believe will provide acceptable long-term returns for us. We continue to evaluate the viability of alternative lending models in the state of Florida, and we expect to resolve our Florida situation during the third quarter of this year.

We are very encouraged by the early results that we are seeing from our new full service neighborhood financial centers and by the growth that we are seeing in our direct lending state operations. Fees from our direct lending storefront operations increased from $36.2 million during the first six months of 2005 to $40.1 million during the first six months of 2006, an increase of 10.8%. We believe this growth demonstrates positive momentum and favorable operating trends in the core on-going business of our retail micro-loan segment.

For the remainder of 2006, we expect the new products that we are rolling out under our multi-product line strategy to contribute to revenue growth within our retail micro-loan segment and we expect to see improved profitability both overall and on a per-store basis.

Given our recent decision to exit North Carolina and West Virginia, an expected return to profitability in Arkansas and potentially Florida, as the other states affected by the FDIC's guidance and an expected seasonal improvement during the latter half of the calendar year, we expect our retail micro-loan segment to return to profitability during the second half of 2006.

Consumers who currently use our retail micro-loan storefronts largely have been ignored by mainstream financial institutions. However, our market research indicates this under-served population craves the opportunity to gain access to credit card offerings, installment loans, auto loans, bill payment, money order, money transfer and other financial products and services.

We believe that through effective risk-based pricing, through educating consumers on financial empowerment, and the multiple products that we can make available to them and through reporting our consumers' activities to the credit bureaus, we can provide the under-served consumer with both the convenience of the products they desire and a chance to establish or rebuild their credit files and scores.

Based on the 75 million consumers that sit within our underserved segment and our desire to be the premier provider of financial products and services to these consumers, we see it as critical that we have a robust research and development engine.

This brings us to our other business segment. You should expect us to continue the various start-up programs and testing that we have been undertaking within our other segments for the past several quarters. Whether it is market testing for new credit products or exploration of new delivery channels, such as Internet-based micro-lending, or our development effort on a centralized decisioning platform, one key to our future success lies in our ability to diversify our product mix and generate new revenue strength.

Some of the benefits of the other segments development efforts are ultimately realized through our various other segments. For example, our marriage of retail micro-loan underwriting technology with a credit card offering, the cost of which were borne largely within our other segments, is already producing on-going quarterly profit for us within our credit card segment.

Before I turn it over to J. Paul, let me acknowledge the latest developments affecting our pending CardWorks acquisition.

During the second quarter, we amended our agreement with CardWorks to extend the period to close the acquisition to October 2 of this year and increase the purchase price to a maximum of $302.5 million, reflecting the increased value of CardWorks since we announced the deal last fall.

We have been working over the past month to gain regulatory approval from the FDIC for a change of control for CardWorks' Merit Bank Charter. We learned last Friday, however, that the FDIC has placed a moratorium on approving changes of control for industrial loan corporation banks like Merit Bank.

This moratorium affects all ILC acquisitions and change of control applications before the FDIC and makes it unlikely that we will obtain the necessary Merit Bank approvals prior to October 2. While we plan to work with CardWorks to obtain an extension of our agreement in light of this FDIC development, we don't have any assurances for you at this time as to whether or not this will be possible.

Should we not be able to obtain an extension from CardWorks or not ultimately be able to obtain regulatory approval for the Merit Bank change of control, we will redeploy the $242 million that we had allocated to this acquisition toward other investment opportunities, which may be comprised of organic growth, acquisitions of complimentary business line or repurchases of our outstanding shares pursuant to a $10 million share buy-back authorization approved by our Board of Directors in May.

Capital deployment will continue to be a top priority as we look to grow our business and expand our reach.

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

Thank you, David. To recap our second quarter results, we reported managed earnings of $48.8 million, or $0.97 per common share on a fully diluted basis, and GAAP earnings of $28.3 million, or $0.56 per common share on a fully diluted basis.

As of June 30, 2006, our book value per share increased to $16.82, up from $16.29 as of March 31 of this year, and our equity-to-managed-loans ratio was 31.1% at the end of the second quarter.

Our liquidity position remains strong. As of the end of the second quarter, we had over $650 million of immediately available liquidity, including unrestricted cash balances of $128.1 million. The remainder of our available liquidity position relates to additional cash draws tied to our collateral base within our originated portfolio master trust and existing securitization facilities.

To highlight some of our key second quarter managed loan statistics, we experienced a 23.7% net interest margin versus 25% in the first quarter and 22.7% in last year's second quarter.

While still 100 basis points higher than our net interest margin in last year's second quarter, our net interest margin declined between the first and second quarters of this year, principally due to the trending second quarter normalization of finance charge and late fee charge-offs relative to the beneficial pull-forward effects that the October 2005 bankruptcy law changes had on our first quarter charge-off levels.

Our second quarter net interest margin also was offset by interest cost on $150 million of draws that we made in the second quarter on the structured finance facility secured with our largely fee-based lower tier credit offerings.

We saw the same effects of trending bankruptcy normalization on our charge-off ratios, as our adjusted charge-off rate was 8.3% for the second quarter versus 7.1% in the first quarter.

And our net charge-off rate increased from 8.5% in the first quarter to 9.3% in the second quarter. Comparing this year's second quarter to last year's second quarter, however, our net charge-off rate decreased from 11.8% to 9.3%, and our adjusted charge-off rate is only 30 basis points higher year-over-year, even without the benefit this year of any credit card portfolio purchases since January of 2005.

Bottom line is that we feel very good about our credit quality on the whole for the second quarter and the foreseeable future.

Our positive outlook on credit quality is based largely on our analysis of vintage data. One might not reach the same conclusion based on only a cursory review of our 60-plus day delinquency rate, which has risen from 8.3% on June 30, 2005 to 10.6% at March 31, 2006 to 11.5% at June 30, 2006.

Diving further into the details, however, one must note the beneficial effects on our June 30, 2005 delinquency rates of first quarter 2005 portfolio purchases, including the associated exclusion from our managed receivables data of receivables associated with accounts in late-stage delinquency status in the sellers' hands as of the date of our first quarter 2005 acquisitions. One must also consider our typical seasonality patterns in comparing first quarter and second quarter delinquency rates.

Even more significant than this analysis, however, are the heightened delinquency rates associated with our largely fee-based lower tier credit card offering. As we have noted in the past, our delinquency statistics and ultimately our charge-off ratios will drift upward with the mixed changes that we have seen in managed receivables through the significant growth we have experienced with our largely fee-based lower tier credit card offering.

We fully have anticipated this and believe that the heightened delinquency and charge-off levels associated with this product offering are very reasonable based on the relative returns offered. We also should note that, given the shorter life cycle of many of the accounts underlying the receivables associated with our largely fee-based lower tier credit card offering, we can also expect some volatility in our delinquency statistics based on the timing and relative volumes of quarterly account growth underlying these receivables.

Our other income ratio has experienced significantly favorable trending improvements over the past several quarters, based on the fees inherent within our largely fee-based lower tier credit card offering, the receivables of which comprise a growing proportion of our managed receivables.

Our other income ratio also is the primary managed receivable statistic affected by the higher and somewhat more volatile delinquency rates associated with our mixed change toward a greater weighting of receivables associated with our largely fee-based lower tier credit card offering.

The fact, for example, that the ratio of principle receivables to total receivables for this category of receivables is much smaller than for our other originated and purchased credit card receivables, means that our net charge rate and adjusted charge-off ratios are not likely to be adversely affected by the higher growth charge-off that we experienced within the receivables underlying this offering.

While our second quarter 2006 other income ratio was significantly affected by the trending bankruptcy normalization previously mentioned, some of the 230 basis point reduction in the other income ratio between the first quarter and the second quarter this year can be attributed to the delinquency volatility that I previously mentioned.

Wrapping up the discussion of our statement of operations, I'd like to highlight a few notes about our expense items.

Marketing costs declined slightly across total company initiatives in the second quarter and we expect marketing spend to be relatively flat to second quarter levels for the remainder of this year, provided we don't see any significant shifts in economic or other market conditions.

The operating ratio dropped from 18.5% in the first quarter to 16.1% in the second quarter, and this decline is largely the result of the good will impairment charge that we took in the first quarter within our retail micro-loan segment.

The increase in our operating ratio in the second quarter of this year, compared to the second quarter of last year, is principally associated with the mix change that I previously discussed within our managed receivables.

A disproportionately growing category of receivables associated with our largely fee-based lower tier credit card offering is comprised of accounts with smaller receivable balances than those accounts underlying our originated portfolio trust and acquired portfolios. The addition of these many new accounts with small receivables balances means more customer service interactions and higher costs as the percentage of average managed receivables than we have historically experienced with our originated portfolio master trust and acquired portfolio receivables.

Overall, we're very pleased with the financial operating and statistical data experienced with respect to our multiple business segments during the second quarter. While this data included the effects of a generally favorable economy and good credit environment within our sector, we see nothing in this data to suggest any material changes in our third quarter credit outlook.

Although the regulatory developments that David mentioned interject a greater degree of subjectivity than normal into our guidance process and there are potential scenarios toward the resolution of these developments that could materially affect our estimates, we currently anticipate third quarter managed earnings to be at about $1.00 per share.

We discussed in detail within today's Form 10-Q filing the various components of our GAAP income and many of our managed receivables statistics and I encourage you to review that filing for more details on what we believe has been another solid earnings quarter for CompuCredit and our shareholders.

Let me conclude now by thanking everyone for participating in our second quarter earnings call. We will now open things up to any questions that you may have.

[Operator instructions] And your first question comes from the line of Sameer Gokhale with Bear Stearns. Please proceed, sir.

Thanks. Good evening. Just wanted to clarify, during the quarter, was I right in thinking you have two kind of non-recurring charges, one for $819,000 for another write-off of intangibles and then another $1.8 million reserving charge for the New York Attorney General settlement. Are there any other one-time items in the numbers this quarter?

Well, I'm not sure that one-time items is the appropriate description for it, but we did pay off the retail micro-loan segment loans, and we had a write-off of deferred loan costs there. I believe it was about $700,000 or so.

Okay. And then on a different topic, with the FDIC investigation into CB&T and the arrangement that CompuCredit has with CB&T, it sounds like from the announcement that it's not an annual review. It sounds like it's more, like, something specific this year that they're doing. Is it in some way related to the whole bank charter issue that we know has been postponed until January 30 of next year? Was it related to that or is it something else?

Sameer, it's a -- the inquiry from the FDIC is a -- is actually a non-public inquiry with our partner, CB&T, and we're working very closely with them to respond to any questions and the like. But inasmuch as it is a non-public issue, we can't really comment a great deal on what's in that.

Okay. And then on the CardWorks acquisition, you had mentioned -- you said that it's going to be pushed back, obviously because of the whole FDIC issue, and you've got until October 2. I guess, CardWorks is locked in to sell to you guys basically. But do you have a sense for whether there are other buyers? I mean, you must be talking to CardWorks pretty frequently. Have they given you a sense for how committed they are? Have they found someone else? How are they thinking about this?

Well, we -- you're right. We have had conversations with the parties at CardWorks. We believe that they have a -- continue to believe that they have a good company and a good operation. And we have discussed a variety of ways that we might look to work with them moving forward. One of the concerns out there is we have no way to know whether or not the FDIC decides to have an additional moratorium on ILCs at some point, after this one comes up. So we are discussing with them ways that we might look to work together moving forward, because we both have a fair amount invested in terms of understanding each other's business and the philosophies. And we think there are potentially ways we will work with them in the future, whether we get this transaction done or not.

Okay. That's helpful. And then I ask one more question, hop into the queue, but as far as your payday lending stores, you said that you've rolled out the technology platforms in all your stores so you can capture underwriting data. I mean, have you tried any preliminary cross-selling initiatives, and how successful have they been? Can you give us some numbers around those?

We have, in Texas we opened 19 new stores, that were full service, or several product stores, as opposed to a single product store. And the early results on tha t-- I can't give you the exact numbers -- but the early results on that have been very encouraging in that we have seen more early activity than we what you would normally see in a single product new store opening. So, we're pretty enthused. The early results give us reason for some level of enthusiasm, there.

Okay, that's helpful. Thank you.

Your next question comes from the line of Moshe Orenbuch with Credit Suisse. Please proceed. And your line is open.

Sorry. You mentioned that if the CardWorks deal doesn't close that you would have the opportunity to use the cash flow in other ways. I guess the real question that I would have is, kind of every quarter that it's delayed, you kind of generate $40, $50 million of excess capital. Why isn't that capital already available, every quarter that goes by that you haven't made that deal or other acquisitions, to repurchase stock? And I mean, I think that we'd sort of like to see you take something of a stronger stance on the use of that capital that you are currently generating.

That's a fair question and, as I mentioned in my remarks, especially at the level that it is at now, the capital deployment that we choose to undertake at certain levels, certainly our stock looks like a pretty good value. And that we can get the types of returns that we want to get for our capital by buying our own stock back.

On a long term basis, though, one of our goals has been to look to diversify our business a little bit. We have looked at some very large transactions over the last few months and got down the path a little ways in some of those of things that we looked at. We are, though, always going to have a very disciplined approach to any acquisition.

We believe in the theory that there are no called strikes, so we can wait for the fast pitch. So, we're not going to chase a deal. But, you make a good point that, with our stock price declining over the last several months, that that very well may be a good opportunity for us to deploy some of our capital.

Thanks.

And your next question comes from the line of John Hecht, with JMP Securities. Please proceed.

Yes, thanks for taking my questions. Actually, most of them have been asked. Two quick questions -- have you guys ever commented on maybe changing the format of the CardWorks acquisition, potentially doing without the bank as part of the deal?

Well, that's clearly something that we would look at with CardWorks, but at the end of the day, they've got a successful company that includes the bank right now. And we would certainly entertain that and have had discussions with them about that and will probably continue to have discussions about that. But, we can't really say whether there's going to be a favorable outcome along those lines.

Okay. And then the second question is, after a series of quarters where you had declining average account balances -- and that was due to a product makeshift to the lower tier product -- it appears that product average balances grew from Q1 to Q2 '06. Does that tell us anything about maybe you've struck a good balance between, in terms of your origination goals, between the lower prime and the near prime customers? Or is this more of a seasonal change?

Well, we are happy with the balance between our upper tier and our lower tier, but you do also have some seasonality in there.

Okay. So we should now model this based on more seasonal trends, rather than product makeshift trends?

I don't think that we are looking to shift our product mix over what it's been the last several quarters.

Yes, and I think, John, you could see some shifting there based on just the timing of marketing efforts within various components of our business and the deployment of marketing resources towards one product versus another in the future.

Okay. Thanks very much.

Your next question comes from the line of Carl Drake, with SunTrust Robinson Humphrey. Please proceed.

Good afternoon. J. Paul, maybe you could help me in terms of on a managed earnings basis, trying to understand some of the unusual -- I know you don't like the term unusual items -- but maybe the items that were not typical in two areas. One, retail micro-lending particularly as it relates to North Carolina. There are some losses that were flowing through in the second quarter from the change in the FDIC regulations.

And also you, I believe, operated some stores for a period of time at a loss in North Carolina. So I'm trying to quantify that, and then, maybe, if you could quantify it across the entire micro-lending area. And then second, in terms of the Spitzer settlement, on a managed earnings basis, what the impact was in the second quarter there as well, in terms of refunds, credits, lost fees, et cetera.

Okay. Starting first with the micro-loan segment information. There really are not a whole lot of differences between managed and GAAP vis-à-vis the retail micro-loan segment. The various impairment charges all occur during the same quarter for -- we had some intangibles write-offs in the second quarter which were the same for managed and GAAP in the first quarter. We had the good will impairment charge which was the same for managing GAAP.

The one difference that you will see between the two sets of numbers has to do with like, in the rest of our business, the allowance for doubtful accounts, which exists on our GAAP books, but we actually look at the time of actual charge-offs occurring under various systems of records in our managed books. So that is the only real difference for that particular item.

As for the --

And what was that in the second quarter in terms of the actual charge-offs flowing through in the second quarter?

You know, I don't have that number in front of me right now, Carl. There -- you can probably take a little bit of a look at the delta between our gross and net receivables for the valued services business at the beginning of the quarter and then at the end of the quarter, and compute that impact. It's on our segment data. So take our gross receivables, less our net receivables for the retail micro-loans business, beginning of the quarter, end of the quarter. And that will tell you the bad debt reserve relief or provision added during the quarter and the impact on charge-offs there.

Okay.

With respect to the New York AG matter, we had just a slightly larger managed expense than GAAP expense in the second quarter attributable to the fact that we had the bad debt reserve in our GAAP financial statements that offset a piece of the credits that we would need to be giving to consumers. Whereas, you don't have that offset in the managed results. And so, it was slightly higher than the $1.8 million additional that we added in the second quarter on our GAAP financials.

And any ongoing impact from some lost recognition of the accounts that were lost in that settlement or closed down?

Well, effectively, what we've done is we've provided an accrual for both managed and GAAP purposes that will offset anything that is not already absorbed by charge-off that might have occurred in the past or allowances that may have been provided in the GAAP financials in the past.

So, if your question is have we fully accounted for the effects of this settlement on all of our activities to date and do we have a reserve that's sufficient to absorb the credits as they are being provided in the third quarter of this year on both the managed and GAAP basis, you're exactly right. I mean, that is in fact the case.

Okay.

We get into some further detail on that in our third quarter Q. We expect to provide all of the applicable credits that we will be provided in the third quarter, and that will be, in essence, those credits will be offset by a reversal of the liability as an offset against that amount into our third quarter results.

Okay. And on the CardWorks deal, has there been any -- I know we've beaten this with a dead horse a little bit -- but, is there discussion about a two-stage transaction where you could go ahead and buy the receivables and the portfolio purchasing business. And then once -- and if the bank does close -- I'm sorry, if the FDIC does approve or lifts the moratorium -- you could bring in the bank and refinance out using the deposits, refinance out the securitization financing used to close that transaction. Is that something that is a possibility?

Well, it certainly it's a possibility. As I mentioned a little while ago, I think that they have a good business as it goes along today with the bank included. So, I wouldn't say it's a probability, but it certainly is a possibility.

Okay. In terms of guidance that you've given historically on your ratios, you know, other income ratios, operating ratios, DM, et cetera, those were impacted somewhat by CardWorks. I think they were -- there's somewhat of a deterioration including CardWorks in there. Would we expect to see slightly better trending metrics without the inclusion of CardWorks?

You know, I don't really have a with and without in front of me right now. I would say though that our product mix today probably produces a little bit higher other income than the CardWorks product offering. Net interest margin would probably be fairly comparable. Adjusted charge-off rate would probably be fairly comparable with and without. But, the other income item would probably be a fair bit different, given our product mix versus CardWorks product mix today.

Okay. That's helpful.

The retail micro-lending fees -- you've got our lower tier credit card offering that they don't have. So that would be where you see the biggest difference, I think.

Okay. The last question on credit quality. If you could-- there's been a fairly sizeable provision on your GAAP income statement that last couple of quarters, and I was wondering if that was related to the fact that from a historical, you're not buying portfolios. It's more organic growth than buying portfolios where you have a credit discount and then possibly also some seasoning that's going on with the mix shift. Is that how we should read into that?

Well, I think there's two things. One, with respect to purchase portfolios, we really in the past have not held any purchase portfolios on balance sheet. They've all been securitized. So there's been no provision or allowance associated with the purchase portfolios on our books.

So, what you're seeing in the way of our allowance for doubtful accounts and our provision is really a build up of an allowance that is required under GAAP. Wherein, under GAAP, what you really don't take into account the value of the receivables. That is to say, you don't look at the future IO strip that's going to be coming on the receivables and such. You just simply look at the balances today, and what are you not going to collect out of the balances that exist today, without regard to any future earnings you may get on the asset.

So, the bad debt reserve buildup is really associated with the on balance receivables growth that we've had within the business. And as I mentioned before, some of the mix shift that's occurred, even within our on balance sheet receivables as we've grown our largely fee-based lower tier credit product at a faster rate than say our cars receivables or our retail micro-loan receivables.

Okay. Thank you.

And your next question comes from the line of Joel Houck, with Wachovia Securities. Please proceed.

Thanks. The question has to do with dynamics behind delinquencies and other income. I mean, typically in credit card space as delinquencies rise, we see an offset in terms of higher late fees, over the limit fees. I'm not sure I fully understood the earlier explanation. Can you kind of walk through what drove the other income ratio down in light of the sequential increase in delinquency rate?

What drove the other income ratio down in light of the increase in delinquencies --

Right. I mean, typically when delinquencies goes up, aren't you getting more late and over limit fees, which drive income ratios higher?

You know, a lot of this, Joel, has to do with the volatility that I mentioned with regard to the fact that we had some pretty large marketing efforts in the fourth quarter of last year that are rolling through delinquency buckets and into charge-off status.

Okay. I guess I wasn't clear on what's causing the volatility from one quarter to the next.

I'm sorry -- one more time, Joel?

I guess I'm not clear, J. Paul, what's driving the downward shift in other income ratio this quarter as opposed to it being higher in Q1. But that's what I'm not -- what I don't fully understand. Could you walk through that explanation that you gave earlier, I guess, or provide more color on it?

Okay. High growth in receivables levels associated with the lower tier product in the fourth quarter of last year relative to growth rates in the first quarter of this year have translated to delinquencies, high delinquencies before, in the first quarter, rolling into the second quarter and charging off.

Additionally, with respect to those higher levels of delinquencies, we had greater amounts of interest and fees on late-stage delinquent accounts that we did not accrue into our managed or our GAAP earnings during the second quarter.

Okay. Okay. So is that an accrual reversal of previously accrued fees? Or, how does that work?

No, it's simply, given those delinquencies that roll through the significant buildup of the late-stage interest in fees, along with the delinquencies, along with the charge-offs contributed to the other income ratios.

Okay. The last question, again on CardWorks, it strikes me as interesting that, even if they were to sell to somebody else, that other entity would still need approval from the FDIC for the bank charter. So is it your-- I guess you don't know what they are going to do. But it seems to me like there's at least a decent chance that this could be extended out and who knows what the FDIC is going to do.

I mean, it's ridiculous that they cannot rule on the Wal-Mart case. And I don't want to vent on the conference call, but it just strikes me as crazy.

But to the extent that hangs out there, they still have a change of control issue that would require FDIC approval, would they not? And therefore, may they -- would it be possible to just kind of hang out there with you guys until the FDIC makes a decision?

We -- there's a lot of things that are possible out there, and that is clearly one of them. And right now we don't know exactly which direction this is going to go.

And you're right about the constraint. While the moratorium is in existence, there's really nobody who can get FDIC approval on that change of control.

Right.

So that would -- one would think they're not going to sell it away from you, just because of the bank issue. I mean, they may get a better offer, but the bank issue is the bank issue for anybody. Right?

Correct.

Okay. Thanks a lot, guys.

And your next question comes from the line of Larry Kosov with SAC Capital.

Hi guys, can you hear me?

Yes.

Yes.

I just have a couple of questions. Can you talk about the 10 million share buy-back that was authorized in May? Is that -- just getting back to Moshe's question about the generation of capital. Can you start buying back stock regardless of what happens with the $200 million of capital that's earmarked for CardWorks?

We have the liquidity available to do that, yes. Yes, we do have the liquidity available.

At $650 million total, you know, we had simply had $242 million of that $650 million earmarked for the CardWorks acquisition.

Okay. So you can now, I mean, after tomorrow, get into the market and buy back your stock.

We've got the liquidity available to do that, should be make that decision. Yes.

And let me ask you, with regards to CB&T agreement, should the FDIC keep looking at this or maybe making some kind of an announcement? How long does that contract owe?

The contract goes to March of '09.

Okay. So, there's no near term risk of CB&T saying, 'We don't want to be in the business anymore.'

We don't think so. They've been a very good partner of ours for ten years, I guess, and we anticipate they'll be a good partner for the foreseeable future.

Ok, if you can bear with me for just one or two more questions. Can you just talk -- on all the investment in the new products and on something like the Imagine Card -- can you just maybe give us a sense on what the ROA is? Because we see the volatility within the C income and the delinquency numbers. Can you -- maybe just looking at the product on an overall cycle, what's the ROA on the product?

On the Imagine product?

On the Imagine or on the deep sell prime products you're getting into that are causing some of the delinquency trends or the volatility within the operating income line. Can you just give us a sense of, if there's volatility every quarter, like just give us a sense of what the over-the-year type of ROA is on the product?

Yes, Larry, the only thing we've said in the past about this, and I think we're probably going to stick with where we've been on the past year on this point, is that the ROAs on this lower tier product offering meet our ROE hurdles without any leverage. We certainly, as you saw, we do have leverage against the product offering now.

You're actually using the $150 million Merrill conduit that they've given?

Actually, that facility is not with Merrill Lynch. But we do have leverage against the asset class the first time. But we have historically said that our ROA meets our ROE hurdles without any leverage against the product.

As for the issue of volatility that I mentioned, a lot of the volatility that we've discussed today relates to kind of some spikes that we've had in marketing during various quarters with respect to the product that -- and a fairly short life cycle of some of the accounts within the product. So, as marketing stabilizes, we've been on a pretty rapid growth rate for the product. You should have less volatility as you move forward there. We still believe that the ROIs are very satisfactory and still would maintain that they meet our return on equity hurdles without any leverage.

Okay. Can I just ask one more question for David?

Sure.

As we see the market's appetite for finance companies and anything related to sub-prime and what the stock has done, with all the excess liquidity and excess capital you have on the balance sheet on the insider ownership of the stock, have you thought at all about taking the company private? There seems to definitely be a private equity appetite for companies in this space and, as you've just commented before, that the stock is certainly undervalued. Just as the biggest shareholder our there, can you give us some thoughts?

I will tell you that certainly, as you point out, there's a lot of financial transactions that get done, and people oftentimes talk about, 'You guys ought to do this or you guys ought to do that.' So, have we ever looked at that and said we might like to do that? Yes, we've sort of kicked it around a little bit. But in terms of kind of looking and saying, 'Well, let's take this company private and start a process of that to like?' No, we haven't done that.

Okay.

And your next question comes from the line of Sameer Gokhale, with Bear Stearns. Please proceed.

Hi. Just had a few follow-up questions, if that's all right. On the Jefferson Capital business, J. Paul, I think you had mentioned that the pre-tax income increased by almost $7 million -- $6.6 million. Was that attributable to growth in the purchases of the portfolio, just the way the cash collections come in? Or, is that because you just have a greater number of portfolios that have been fully amortized, because you've recovered all of your investments in them?

Well, I guess two things. It actually did not increase by $6.6 million. The pre-tax income for that business was $6.6 million in the first quarter, so the magnitude of the increase is not anything extraordinary. I mean, we don't think they were great results, but nothing along the lines of what you said with the $6.6 million increase.

Okay. And then, in terms of the number of accounts again, I just wanted to go back a little bit to one of the questions that was asked earlier on the account. I think you added 433,000 accounts this quarter. So was I correct in understanding that you are saying that they were kind of a mix of a half and half lower tier versus upper tier sub-prime?

No, I said we were happy with the mix.

Okay. And then the other question that I had was in Texas you said you've opened some of the newer branches with the new technology platform. Now isn't, if I understood correctly, wasn't Texas the state where they had the credit services, the CSO, replacing the banks which offered payday loans through bank lending arrangements. And so do you have a similar CSO kind of product that you're offering there?

Yes, we do. That's part of our business model with respect to some of the credit products and we discussed that in our 10-Q for this quarter as well.

And -- but the returns on the CSO-type loans, aren't those lower than what you might generate from payday loans made in states where you don't have these type of CSO restrictions, where you can just make a regular stand-alone payday loan? So, I'm just curious as to why you would roll out these stores in Texas, as opposed to another state without the restriction.

Well, remember that we -- part of our model there is having four or five products and, if you have success in multiple products, then you can certainly take a little bit less profit margin on each individual product. And we're very pleased with the level of competition in Texas and the early results out of there.

Right. No, I think that makes sense as far as offering all the products. I was just curious as to the rationale for to why you choose to roll out this kind of suite of products in Texas as opposed to any other state. Is there a specific reason?

Well it's -- part of that is store design, training people, instead of retraining people, and the like. So if you're going in to a new area, it's easy to test all of that, because you've got new people, new stores, a different layout of the stores and that kind of thing.

So now that we are seeing success there, we are going into other areas where we have had traditionally just the micro-loan product and looking to expand those stores to have the same type of product mix as Texas has. It was just from a De Novo standpoint, it was easy to go in and test all of those things all at once with new training and new people and new stores for that matter.

Okay. That's helpful. And then, just my last question. J. Paul, you were talking about some of the -- I guess you used financing or obtained financing this quarter leveraged against your lower tier sub-prime receivables that you had on balance sheet. What was the principle amount of those receivables again? And how much leverage did you obtain against that portfolio? Was it 100% or something less than that?

Yes, we actually got the facility in the first quarter, and the second quarter drew against the facility for the first time. I think I said this in the first quarter call as well. I don't think we've provided a split between our finance charge receivables and our principle receivables in our public filing. What I will say about the advance rates though is what I said at the time is that they more or less coincide with traditional ABS advance rates on principal balances that you would get with any type of securitization deal.

Okay, but this quarter you actually, you know, like last quarter you actually obtained the ability to obtain leverage against that portfolio, but this quarter you actually went ahead and did that. So I was just curious what, how much that portfolio you obtained leverage against. Was it 20%, 10%, all of it? That's what I was kind of wondering.

Well, essentially, we -- if I address your question this way. The facility that we did get in the first quarter is $150 million facility. And we have fully drawn on that facility. And as we grow the receivables base underlying this product offering, we certainly will be looking for additional liquidity against the offering as we continue to build up principle receivables that are above and beyond the collateral requirements for the $150 million facility.

Okay. That's helpful. Thank you.

And your next question comes from the line of Moshe Orenbuch, with Credit Suisse. Please proceed. Your line is open.

Gentlemen, your next question comes from the line of Barry [Selling] with Merrill Lynch. Please proceed.

Pretty close. So, I've got a couple of questions. First off, could you kind of walk us through the economic impact of leverage on the fee-based product with respect to both an accelerant of ROE and the impact of the bottom line? That would be my first question.

You know, without kind of giving you the specifics as to the ROA and the asset or the overall ROE and the product, I mean, it's much like any ABS offering, wherein if you're -- I'll give you an example. If your ROA is 3% and you've got 90% of leverage, for example, your ROE is going to be 30%. The math is similar. The illustration that I gave is not the facts associated with this product offering, but just an illustration of how it would work.

Okay. So, third quarter, you talked about making a buck. Inclusive of that view, is there any buy-back included in that?

Buy-back of shares included with that, in that view of our dollar earnings per share, a guidance? The dollar that we -- estimate that we gave does not contemplate a share buy-back.

Some of the charges you spoke about that are going to roll through in the third quarter.

I'm sorry. We didn't get all of your question, Barry. We just got the last part of it, I think.

You know how this quarter there is some charges that roll through the P&L that you generally talk about on the call when someone asks a question.

Yes.

This quarter you kind of alluded to the fact that there will be some comparable type items in the third quarter. Does the dollar include that?

Actually, not. I mean, we -- as reflected in our Q, and we mentioned this earlier in the call, when we made our decision in the second quarter to shut down North Carolina and West Virginia stores, we took a full accrual for the cost of those store closings in the second quarter. So, we really don't see any overhang going into the third quarter associated with say the kind of unusual items, if you will, that we had for the micro-loans business. The only possible open item at this point -- we've resolved Arkansas. We've got an alternative lending product in Arkansas. We haven't resolved Florida yet and we are optimistic that we will have a viable alternative product in Florida. And there is something there that will allow us to keep those stores open and to have revenues offsetting what is now a little bit of a drag associated with the cost of keeping those stores open while we develop an alternate product.

So really nothing on the retail micro-loan side of things. I've already discussed, I guess, in the Q&A and also in some of the prepared remarks, the impact of the New York AG issue and how we have fully reserved for the anticipated cost of providing the various credits in that settlement. So there aren't really any other significant kind of one-time items that we've baked into our forecast at this point.

Okay. And so, why don't I just -- I mean I'll just ask a question that several people have tried to ask a variety of different ways. Do you guys anticipate basically just telling the street, 'Take CardWorks out and here's like kind of our view of what the operating profit of this business is going to be like going forward.' Because I think that would be helpful. The overhang associated with CardWorks, every quarter somebody asks the question, 'When is it going to close? When is it going to close? When is it going to close?' And you might as well just take it out of earnings estimates and just, you know, if you get it, that's great. People bring their earnings estimate where they need to be, but at least let people understand, like, what you think your forecasted view of your business is going to be.

That is a fair question, and I think that makes sense. As I've said on this call, we got a little bit blindsided last Friday when the FDIC came out with this moratorium. And so, we've kind of made $2.00 on a managed basis, a little over $2.00 on a managed basis on the first six months of the year. We're very excited about our business, all the lines of business that we have. And with or without CardWorks, we think it's a great business. CardWorks is a good business. And if we could, we would like to get it, but there is certainly no guarantee that that will ever happen.

And so, if you're asking from a, 'How should we look at this company? Should we take that out or should we leave it in?' You know, there is no agreement that goes past the moratorium right now, so if I were sitting there making that model, I'd take it out. And if it comes in, then put it back in.

But in fact, Barry, we did just that. The number that we gave you guys for the third quarter does not contemplate any CardWorks effect.

Well, I hope not. And so the fourth quarter, and outlook -- I mean, the question is -- I mean one of the comments I've heard from other shareholders and I've expressed it to J. Paul, who I know is on the call, so I'm not going to hold back about it, is I think it would be helpful for investors if you were able to give an outlook that's a little bit longer than maybe a forward 60 or 90-day view on the company.

I think it would be a lot easier for people to get comfort about the earnings power and capacity of the balance sheet and the resources available to you if you did that. And it may improve the multiple, which is, by the way, not just to shareholders benefits, because the stock would go up, but it's also beneficial to you guys. As you want to execute potentially larger deals in the market, you will have a better currency in which to attempt to finance those deals.

And that's a fair question and [same comment]. Over the years, we've issued different levels of guidance, and in a couple of years we issued no guidance. Today, I think that the trend is clearly towards less guidance rather than more guidance. And many companies have moved away from providing any guidance. And I know it makes it easier for us to say, 'We think we're going to earn X dollars per share in 2007 and X dollars plus Y per share in 2008.'

But our business is a difficult business to forecast on a long-term basis. There are a lot of moving parts. There are a lot of opportunities that we pursue that may make the numbers go up or may make the numbers go down short term because of long-term gains.

So, our approach has been for the last couple of years that we are going to sort of give a little bit of a forward look, but other than that, we're going to talk about our business, talk about our business lines and try to answer questions people have. But we don't really feel comfortable posting up numbers for out in the future several months.

Okay. Well, I appreciate the honesty of how you guys kind of are trying to balance things out. Thanks so much.

Ladies and gentlemen, this does conclude the question-and-answer portion. I would like to turn the call back to your speakers for closing comments.

Thanks, everybody, for participating in the call and joining us this evening. We look forward to speaking with you in the future. Take care.

Ladies and gentlemen, this does conclude the presentation and you may hang up. Thank you for your participation.