Atlanticus Holdings Corp (ATLC) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2006 CompuCredit earnings conference call. At this time all participants are in listen-only mode. We will conduct a question-and-answer session at the end of this conference. (OPERATOR INSTRUCTIONS).

As a reminder, today's call is being recorded for replay purposes. I would now like to turn the call over to Mr. Jay Putnam, Director of Investor Relations. Please proceed, sir.

Good afternoon. Thank you for joining us for CompuCredit Corporation's third quarter 2006 earnings call. Before we get started, I would like to remind you 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 developments, including our plans and expectations with regard to our account and portfolio growth, our acquisitions of portfolios, assets or complementary businesses from third parties, the performance of our credit card portfolios including net interest margins, other income ratio and charge-off levels, growth acquisition plans and expectations for our debt collection, retail Micro-Loans, auto finance and other operations, our earnings expectations and general economic conditions.

For information regarding 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 September 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our website to obtain a hardcopy of our earnings press release, financial statements or SEC filings or to listen to an archived version of this conference call.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 turn it over to David Hanna, Chairman and CEO of CompuCredit, for his remarks.

Thanks to you all for joining us today. We will review another solid earnings quarter for us and share some thoughts about the current state of our business and our outlook. J. Paul Whitehead, our CFO, will discuss financial metrics for the quarter in greater detail. After our prepared remarks we will be happy to answer any questions that you may have.

Today we reported GAAP earnings for the third quarter of $38.8 million or $0.78 per share. On a managed basis, we reported net income of $53.4 million or $1.07 per share. Our net interest margin was 26%, which was an all-time high for us. Also, while our mix changed toward our lower-tier credit card offering continues to cause structural shifts in an delinquency and charge-off rates, we remain pleased with the performance of our managed assets relative to our expected performance curves.

Starting with our largest business segment, credit cards, we continued to experience a favorable economic environment in which to grow and manage our portfolio. We grossed over [$]363,000 in credit card account additions during the third quarter, and we look to maintain our account growth momentum in the fourth quarter and beyond.

The credit card origination success we have had the last couple of years has been terrific and is a tribute to the demand for our products from a huge segment of the population. We have often gauged our market as 75 million to 80 million consumers who are largely underserved by traditional banks and financial institutions.

People are oftentimes surprised at the large number of individuals that fall into the subprime category. FICO has indicated that their average credit score for the United States is 676. This means that half of U.S. consumers with a credit file are below that 676 level. The FDIC has set a score of 660 as the level of subprime lending for credit card products. This means that close to 40% of consumers with a credit file are below the level FDIC defines as subprime. These numbers don't even include the estimated 25 million to 30 million people that do not have a credit file.

Our goal continues to be to try to help this very broad-based customer base with credit card products that enable them to be a part of the credit mainstream. We continue to be pleased with the credit environment in which we are operating, both overall and specifically within our credit card segment.

As I mentioned previously, our mix changed toward our lower-tier credit card offerings has caused structural shifts in our delinquency and charge-off rates, reflecting principally the structural shifts our credit card segment 60-plus day delinquency rate rose from 10.1% at last year's third quarter end to 14.6% at this year's third quarter end.

Additionally, our credit card segment adjusted charge-off rate rose 180 basis points from last year's third quarter to 9.4% in this year's third quarter.

Adjusted for seasonality, we are forecasting these shifts toward higher delinquency and charge-off rates to continue for the foreseeable future, based on the growth levels we expect for our lower-tier credit card products. We are entirely comfortable with these structural shifts, however, given the high level of returns that our lower-tier credit card product has provided for us in the past and is expected to provide for us into the future.

We are also comfortable with the performance of our other credit card portfolios. While we are seeing modest softening within delinquencies and charge-offs relative to the exceptionally low levels that we have seen in recent quarters, our other products and portfolios continue to perform at or better than our expected vintage performance levels. We always closely monitor our customers' behavior and react as needed if we see changes in the economic environment. However, we continue to believe that the U.S. economy presents an attractive opportunity for both short-term and long-term credit card growth and profitability.

Moving on to our other business segments, our Jefferson Capital subsidiary, which invests in previously charged-off receivables, continues to make an increasing positive contribution to our business as GAAP net income before taxes was $8.9 million, a 76% increase over 2005's third quarter. This is significant because this is the first true year-over-year comparison we have had since our transaction with Encore Capital Group in last year's second quarter.

Jefferson Capital continues to reap the benefit of last year's fixed-price forward flow agreement to sell charge-offs to Encore Capital, and we are seeing some nice growth in Jefferson Capital's Chapter 13 bankruptcy and balance transfer collections activity.

Again, we do not have a noncompete clause in our Encore agreement, so should pricing for the broader market of delinquency-based charge-off paper return to attractive levels for us as a buyer, we would reenter that sector in a larger way. Until then, we are content to grow the Chapter 13 and balance transfer program and earn our desired returns on these activities.

Our auto finance business also posted earnings growth over last year's third quarter with $2.6 million in pretax earnings, equaling a 29% increase over last year's third quarter. Our continued focus within this segment is on new product development, which should allow this segment to achieve higher receivables and income growth rates than we have seen to date.

Our retail Micro-Loan business returned to profitability this quarter, achieving $3.3 million of pretax earnings, 11% higher than its third-quarter 2005 pretax earnings. We see this as quite an accomplishment, given the challenges that regulatory changes created for this segment earlier this year.

As you recall, back in February of this year the FDIC effectively asked our bank partners in states which we operated as a processing and servicing agent for state-chartered banks, to cease loan operations under this arrangement. We had to shut down operations in two of the four states affected by this regulatory action, closing some 63 branches over the last two quarters.

In the state of Arkansas, we have switched our operations to lend directly under an alternative product in compliance with state regulations, while in Florida we have just recently obtained licensing approval and anticipate utilizing an alternative lending model to return our Florida branches' profitability late in the fourth quarter of this year.

We continue to be impressed with the early returns from our testing of a multiple product strategy, and we are actively converting traditional monoline Micro-lending stores into full-service neighborhood financial centers. The results of this strategy in Texas have exceeded our expectations, which were high to begin with.

Our product offerings in these stores include auto insurance, debit cards, credit cards, check cashing, money transfer, money order, amortizing installment loans and auto loans, and our offering of these products has been a boon to consumers who otherwise didn't have access to these products and services at traditional banks and credit unions.

We will continue to transform retail storefronts into neighborhood financial centers in the fourth quarter and into next year with the positive momentum from this quarter's operations, expected branch openings and new product rollouts, we expect to see improved profitability, both overall and on a per-store basis in the fourth quarter, which is seasonally a good quarter for this business, anyway.

Additionally, I should also mention that we began exploring international expansion for our retail Micro-Loans full-service financial center strategy, and after researching for the last nine months, we have decided to open four to six de novo stores in greater London during the fourth quarter of 2006. We believe that U.K. consumers will be receptive of a multiproduct financial center and are very excited about the future prospects of international expansion.

Finally, I would like to spend a couple of moments on the activities underway within our other segment, which, again, is somewhat of an R&D effort for us. We continue to invest in various programs and activities to grow our business and help consumers gain access to convenient financial products and services that they desire.

Our R&D into Internet-based lending and stored value cards has enabled us to gather an invaluable amount of data on consumer behaviors and given us ideas on new marketing channels and distribution avenues. While those programs are still in place, albeit not currently at the levels we originally planned, the lessons learned have led us to refocus our efforts into developing a whole new underwriting platform. This underwriting platform is a centralized decision engine that can be used across all of our business segments to leverage the expertise and knowledge gained from originating and servicing multiple products. We expect big things from our centralized decision engine, which will enable us to put consumers in the right product based on their profile.

Overall, I'm extremely happy with the results we have posted year-to-date, and I look forward to the great many opportunities that CompuCredit has ahead of it. I will now turn it over to J. Paul for his financial review.

To recap our third quarter results, we reported managed earnings of $53.4 million or $1.07 per common share on a fully diluted basis, and GAAP earnings of $38.8 million or $0.78 per common share on a fully diluted basis. As of September 30, 2006, our book value per share increased to $17.55, up from $16.82 as of June 30 of this year. Our equity to managed loans ratio was 31.6% at the end of the third quarter, up slightly from 31.1% in the second quarter.

We continue to be well positioned in terms of liquidity. As of the end of the third quarter, we had over $700 million in immediately available liquidity. Beyond our $99.8 million of unrestricted cash at September 30, the remainder of our available liquidity represents draw potential from our securitization and structured finance facilities. This draw potential expanded further in the third quarter as we increased from $150 million to $350 million, the committed financing under our structured finance deals secured by our receivables associated with our lower-tier credit card offerings.

We view the opportunity to draw some $600 million on our securitization and structured finance structures as a major corporate strength. This $600 million does not represent idle cash that is sitting around earning suboptimal returns, but rather represents our ability to immediately draw borrowed funds at reasonable interest rates to provide further leverage against organic growth, acquisitions and our Board-approved share repurchase plan.

Our approach to liquidity is quite simple. We believe we have a track record of being able to achieve higher returns on the capital that we deploy. Given this history, and like so many other aspects of our business, we are opportunistic in our acquisition of capital. If we can obtain capital from diversified sources at reasonable cost, we will do so even if our current liquidity position is more than adequate to meet our existing operating needs.

Highlighting some of the financial, operating and statistical data associated with the receivables we manage, our average managed receivables grew by $85 million and ended the third quarter at approximately $2.8 billion. We posed a record net interest margin of 26% for the third quarter of 2006 compared to 23.2% from the third quarter a year ago. The increase principally is attributable to two factors; the first of which is higher trending quarterly delinquency rate and [has] higher quarterly late fee billings associated with our change in receivables mix toward our lower-tier credit card offering.

Secondly, our generally trending higher net interest margins over the past year also correlate with interest rate increases associated with cardholder accounts; these increased rates being indexed to prime rates, which have increased along with Federal Reserve Board rate increases over the past several quarters.

We do, however, expect our generally rising net interest margin trend to reverse somewhat in the fourth quarter as seasonal charge-offs increase and based on changes in our billing practices that we made late in the third quarter of this year.

In response to comments about minimum payments received from the FDIC in the course of its routine examinations of the banks that issue credit cards on our behalf, we began a review of our practices in this area during the second quarter of this year. As a result of this review, commencing late in the third quarter we discontinued billing finance charges and fees on substantially all credit card accounts, once they become over 90 days delinquent.

Because we have not historically performed any significant collection efforts for our over-90 day delinquent lower-tier credit card offering, we previously did not accrue bill finance charges and fees on these delinquent credit card accounts into income, nor did we factor them into the determination of our net interest margin and our other income ratios for our managed receivables.

This change did have a modest adverse effect, however, on our third quarter net interest margin and other income ratios associated with our other credit card portfolios, and we expect it to have an adverse net effect on our net interest margin and other income ratios associated with these other credit card receivables portfolios during the next two quarters.

Thereafter, however, we expect this change to positively impact our combined gross charge-offs, net interest margin and other income ratios because we will no longer experience any charge-offs or finance charges or fees, no longer build on these delinquent accounts. I should also note that we continue to test and explore other potential changes to our practices concerning minimum payments beyond the changes that I have described here.

Our other income ratio dropped from 16.9% in the second quarter to 15.7% in the third quarter. Contributing to this decline was our decision in the third quarter to discontinue billing finance charges and fees on substantially all credit card receivables that become over 90 days past due. Moreover, leading to this decision, we also experimented with potential revisions to our credit card over-limit fee billing practices, which had the effect of depressing our other income ratio in the third quarter relative to its level in prior quarters.

While we have not ruled out other potential future changes to our credit card over-limit fee billing practices, some of which, if implemented, would adversely affect our other income ratio, we concluded late in the third quarter that the decision to discontinue billing finance charges and fees on substantially all credit card receivables that become over 90 days past due was an appropriate step for now.

As a result of the changes that we have made and absent further potential changes in our over-limit billing practices, we expect our other income ratio for the next couple of quarters to be relatively consistent with the third quarter 2006 other income ratio, after which time we expect some improvement, as there will be fewer charge-offs of fees taken into account in computing our other income ratio.

Our adjusted charge-off rate was 9.4% in the third quarter as compared to 8.3% in the second quarter of 2006 and 7.8% in last year's third quarter. Also at September 30, 2006, the 60-plus day delinquency rate was 14% as compared to 11.5% in the prior quarter.

As David mentioned, the changes in these ratios principally represent structural changes associated with our mix change towards a greater [weighting of] receivables associated with our lower-tier credit card offering. We experienced a lot of success growing this portfolio at the end of last year and into 2006, and these originations have had a chance to mature and season.

Obviously, part of that process is having a higher percentage of the accounts work through the delinquency bucket than we have experienced in the past with our traditional near-prime offering. This is a trade-off we are more than willing to make, considering the returns we can achieve through growth in our lower-tier credit card offering.

Overall, we are pleased with the performance on our managed receivables during the third quarter, which exceeded our expectations in many respects. For the fourth quarter of this year, expected seasonal charge-off patterns, modestly higher trending bankruptcies reversing the depressed levels that we have seen since the fourth quarter law changed last year, and most notably, a $15 million charitable contribution under our shareholder designation program approved by our Board last week and our new practice of not billing interest or fees while credit cards are 90-plus days delinquent, will cause our managed earnings to be lower in the fourth quarter relative to the third quarter.

Again, our new practice of not billing interest or fees on 90-plus day delinquent credit card accounts has very short-term effects as our reduced charge-off levels will catch up with the reduced interest in fee income billings from late-stage delinquent credit card accounts within the next two quarters.

Beyond the first quarter of 2007, this billing practice change will reduce finance charge and fee charge-offs next year in a meaningful way. Considering all these factors, we expect fourth quarter managed earnings to be at around $0.50 per share. Additionally, based on the information that we have today, we are comfortable giving you guidance to expect to exceed consensus analysts' estimates of $4.23 per share for 2007.

Our 10-Q filed today sets forth several reasons for our differing third-quarter GAAP income levels between 2005 and 2006, and I would invite everyone to review our third quarter 10-Q filing for additional details underlying each of the many factors affecting our reported GAAP earnings. Again, as we have noted in the past, our GAAP net income can be volatile based on our securitization activities, and it is for this reason that we and investors and analysts who monitor our company focus principally on our managed receivables and the financial operating and statistical data underlying their performance.

Let me go ahead now and close out by thanking you for participating in our call today and by opening up the floor to any questions that you may have of David or me.

(OPERATOR INSTRUCTIONS). John Hecht, JMP Securities.

Just trying to get a little bit more into the Q4 guidance, it looks like you are telling us that it looks like about $15 million you're taking through costs relative to donation. How much do you see of Q4 changing relative to the change in billing dynamics you cited?

We've looked at that and I think we actually mentioned that in the 10-Q, anticipating about $14 million or so associated with that item.

So, then, in order to compare this apples-to-apples, we would say adjust our estimates by $15 million for the donation and another $15 million for these adjustments related to this accrual?

Yes, I think that's safe.

Also, because historically, you guys were billing them but not accruing them, and now you're simply not going to bill nor accrue. So what you lose is what you eventually collected over time?

That's correct. We billed but did not accrue for the lower-tier credit card product offering because we really didn't apply much collection activities on those receivables, once they hit a 90-day delinquency status. But for our other receivables, we did bill and we did accrue into our managed earnings statistics. On a GAAP basis we have within our FAS 140 models reserves set up, if you will, to ensure that we're accruing only what we expect to collect on any of the other securitized credit card portfolios.

And then last question before I get back in the queue. It looked like you had a slight decline in customer accounts and but you had a good increase in average balances per account. Can you talk about any customer-level behaviors of the sub-600 FICO score, maybe north of 600 FICO score customers relative to balance activity and new customer activity?

Let me just address that. If you go back and you look at some of the prior reported net account balances at the end of each quarter, we made an adjustment as we dug into the system of records that we used, [TSUS], we found accounts that essentially were inactive and needed to be purged from the [TSUS] system. We did that cleanup and made a modest adjustment in prior quarterly reported account balances as well. So that principally is what your seeing there.

I don't have the Q in front of me quite yet. Can you just give me a round with how much, how many accounts that was that you cleaned up there?

It's roughly 100,000 or so in change in each quarter.

Moshe Orenbuch, Credit Suisse.

Could you talk a little bit about what your plans are from a capital usage perspective at this point?

The question, I guess, was on capital usage. That, once again, is the area where we are focused on a lot of our -- both Rich House and I spend a lot of our energy as well as J. Paul, looking at where we might deploy some of our capital. I can tell you that we did look at some, a couple of large transactions during the third quarter that would have eaten into our available capital by a pretty good extent.

Just like I mentioned last quarter, we continue to look at potential uses of our capital within our own stock. We think that that might be something we might do, but we, as always, have ongoing a very active ongoing corporate development area that we think is likely to produce some very attractive uses of capital. So we don't want to do something rash and just jump out and do something to put the capital to use. In fact, part of the reason why we did the capital raise that we have, dry powder in which to take advantage of opportunities that are out there.

We have some opportunities that we're looking at now, and obviously we don't want to be in a situation where we've had idle capital for lengthy periods of time, but we also don't want to be in the situation where we use it too soon instead of waiting for the right deal for us.

Just one on housekeeping. The decline in the fee income ratio this quarter -- you've attributed it, I think there were two separate things? Just to [repeat them].

The first of which is the change that we made late in the quarter on the billing practices whereby we are no longer billing finance charges and fees on substantially all late-stage delinquent accounts, 90-plus a day delinquent credit card accounts. The second was we did some experimentation and testing with respect to over-limit fee billing practices during the quarter. The effect of those tests are resident within those numbers as well. Those are tests that we performed leading up to our decision to discontinue the billings of late-stage -- billings, fees and finance charges on late-stage delinquent accounts.

J. Paul, why does it have a bigger impact, though, on fees than it did on finance charges here? Your margin was quite strong.

Predominantly, it was a test [hedging] that we did related to over-limit fees. Over-limit fees, if you look at our definition of fees, fall into that Fee Income or Other Income Ratio category as opposed to net interest margin. Net interest margin just includes finance charges and late fees.

Carl Drake, SunTrust.

In terms of the guidance from the $1.07 in the third quarter going down to the $0.50 in the fourth quarter, it seems like if you account for the gift and you account for the comment made on the change of the billing practices, that gets you to about roughly $0.39 on a tax-adjusted basis, if I did my math correct. Is there another roughly $0.18 that's related to seasonal patterns and some other items maybe you could touch on?

I think historically our business, anyway, historically has had a little bit lower fourth quarter than third quarter earnings, and some of that is that we typically have a little bit higher charge-offs in the fourth quarter than we do in the third quarter. That has at least been the pattern for our company for a number of years.

I think that some of that is just coming out of summer we typically have a little bit of a reduction in charge-offs and then going into the Christmas season and the like, we end up with a little bit higher loss rates going into those areas.

Yes, I would amplify that and just say that if you go back and look over the past several years, that has been the case. It's interesting when I look at some of the estimates that you guys have put together and I look at them third quarter and fourth quarter, that seasonality really isn't included or reflected in your estimates kind of across the board. But that historical perspective is meaningful, I think, on an annual basis.

But then I mean the seasonality wouldn't be that sharp, of $0.18, would it? Quarter over quarter?

It has typically been more than that.

So you would chalk that up to seasonality, it's not anything related to maybe operating expense expansion? You talked a lot about some expansion initiatives; it wouldn't come from operating expenses trending up, it's primarily seasonality?

No, I don't think so. I think we are excited about the 2007 prospects, so we continue to invest money in the fourth quarter and the like. But I don't think we're looking at any kind of meaningful uptick in operational expenses.

If I understood right, J. Paul, you mentioned that the $4.23 consensus -- there's upside to that in your guidance for 2007; I appreciate that longer-term guidance offered up. In terms of the first half of 2007, could you maybe touch -- I imagine there are still some effect from the change in billing practices they're going to run through and still linger into lower levels in maybe the first quarter and the second quarter with the recovery. Is that how the trendline should look?

Yes, just to give you a little color on that, we are seeing the first quarter being roughly about two-thirds of what we're seeing the second quarter being, for some of the reasons that I mentioned.

So the second quarter is sort of a back to normal from the change in billing practices?

Yes.

And last question and I'll get back in the queue, is on the diversified operations, there's some improved performance there. Should we read into that those are sustainable levels? The retail Micro lending has improved, it sounds like profitability is better, Jefferson Capital as well, auto -- it sounded like all three of those areas had some promising growth prospects where those are sustainable levels to grow from?

We certainly hope so, and we believe them to be sustainable to grow from those levels.

Any comment on growth rates of those? In terms of what they might become as a percentage of your overall earnings in 2007 versus 2006 or growth rates individually?

I don't want to get into percentages of overall because we hope our credit card business continues to grow real rapidly, too. But we are hopeful that we can get all of our businesses growing at sort of anywhere between a 15% and 30% rate per year, and we don't think that's unreasonable.

Sameer Gokhale, Bear Stearns.

In your guidance for next year, have you taken into account any potential for credit quality deterioration in the macroenvironment, or does this kind of assume a more or less stable credit line?

I think we have seen a slight softening over what we were seeing earlier this year in terms of credit performance, but we haven't put a dramatic overlay in terms of the economy getting worse or the economy getting better on top of that. So it includes all of the data and the delinquency data and all that we see today. It does not necessarily bake in either a lot of positive or a lot of negative going into next year.

Just a question, from one of the tables in the 10-Q, it just shows the on balance sheet receivables and kind of a roll forward of the gross receivables and the allowance for uncollectible loans and fees. It looks like, if I'm thinking about this correctly, for the on balance sheet receivables, there were about $130 million of charge-offs this quarter. Is that right? Is that something going on there in terms of the dynamics, or is that $130 million number just not right?

Actually, it's $231 million.

$231 million was the roll forward for the nine months. Correct?

Not for the nine months. You've just got to back out the number on our June 10-Q, which I don't have in front of me.

It was $100 million, so that suggests $130 million for this quarter. I was just wondering if -- is that just kind of a normal charge-off rate we should assume for the on balance sheet portfolio, or was there something unusual with the change in accounting practices or something going through there?

Oh, there wasn't anything unusual, per se. I guess what I would point out to you that if you look at our combined gross charge-off rates just for the credit card business, that number that you quoted is for the entire business, all segments. But our combined gross charge-off rates for the credit card segment, if you look at our table, is $197 million.

Bear in mind that what flows through that provision number, the charge-off number, that flows through that -- I'm sorry, that allows for uncollectible loans and fees number is total charge-off, not just principal charge-off. So it's charge-offs of interest, fees and principal. So that doesn't sound unreasonable to me, given that you have got credit card segment only gross charge-offs of $197 million during the quarter.

I was just wondering, this is my last question but the student lending industry seems to be a pretty high-growth industry. I know there's one company out there that does preprime student loans. Given your business model, which is [to do] FICO, [arbitrage], and to do a lot of data crunching, is that a kind of business that you might be interested in getting into? Are you any closer to that? Have you thought about it strategically? Can you give us any color on that?

Yes. In fact, Rick Gilbert and I -- you don't know this, but Rick Gilbert and I, when we were looking to start CompuCredit back in '95, both of us, '95 and '96, both of us had experience in student loans at that time and actually looked at some private student loan lending there. We were probably five or six years ahead of the curve in terms of what's gone on with that market. But I do believe that is a good business, and I think that we have some traditional history in some of those programs as well, back predating CompuCredit.

So it's an area that does intrigue us. We think it's going to have some growth opportunity. Unfortunately, a lot of those companies that are out there look to get a lot higher multiple than what we sell at, so we're not necessarily going to go buy something at a lot higher multiple than what we trade at but we do think that is a good business, and it is clearly on the radar screen.

Dennis Telzrow, Stephens, Inc.

With regard to these changes you mentioned on the billing and accrual, were those driven out of a final review of the bank by the FDIC? Is that conclusion over with?

No, that look by the FDIC is not over with. It was more in line of us trying to be proactive and address some things that had been raised. While we have always believed our practices and policies have been good business, we are also willing to hear what other people have to say and try to address any concerns they may have. So that's what we're trying to do with these things.

So can I presume that a lot of what they are paying attention to are the things that you responded to here?

We have clearly worked in conjunction and responded to things that they have suggested.

Maybe I missed it but you mentioned here you have a $15 million charitable donation. Is this something you do every year? Or is this abnormal?

We have done it -- this is the third year, and it is not an every year; it is an every -- over the last three years we have taken it to the Board, and we allow shareholders to make a designation as to where they want charitable dollars to go.

I guess I'm trying to figure out, is this a recurring event that we should assume takes place, or is it variable depending on what shareholders say or the Board?

In light of the fact that more than 50% of the shareholders votes also are on the Board, I would say it is both the Board and the shareholders who recommend this. It is not something that is set in stone; it is something that we have taken a look at for the last three years and looked at our earnings, looked at our performance and made the call at a Board meeting late in the year in each of those three years.

We may do in the future, we may not do it in the future. So, there's not a -- it's definitely going to happen but there's not a -- it's definitely not going to happen, either.

You mentioned this Internet lending experiments and also a new underwriting platform that would go across all lines. Is that a one-year project, three-month project, or how would I view that?

We have been working on that project, what, like the last 18 months now?

Yes.

It is pretty much being rolled out.

I think it's going to be, to some extent, evolutionary where we are going to be doing a roll-out. We're in a process of rolling it out now, but I'm sure that there will be refinements, new products added and new decisional capabilities that will develop over time through the product offering.

So could I take that if I went into one of your new stores here in Texas, that would be the tool you would be using on the various products?

We are using it today in connection with some television advertising that we're doing, Internet advertising that we're doing. As to specifically in the storefronts, I don't think we're quite there yet.

Customers in some stores can access our websites, and so they would -- if they access the website, they would have that tool being used behind that engine. But it is not in the stores yet.

[Larry Cosso, SEC Capital].

Did you guys actually buy back any stock this quarter, at the end of the quarter? Maybe if you could even update us after the quarter ended in the current quarter?

We disclosed in our 10-Q that as of September 30 we still had $10 million available under the buyback authorization.

10 million shares.

10 million shares, I'm sorry -- and did not purchase shares during the third quarter.

Is there any update on the FDIC conversations surrounding CB&T?

No, we don't have anything further to add. They are still reviewing CB&T, and beyond that it's -- we continue to corporate, as we have from the beginning. Beyond that, though, the inquiry is non-public. So we're not really at liberty to discuss a great deal of it.

On the capital issue, I didn't really get J. Paul's comment about potentially raising more capital as you go forward here. Would there be a potential to raise more capital without a deal in tow? Would you announce something like that simultaneously, or would you just come right to the market again for another kind of capital raise?

I guess the point I was trying to make, there's two points I was trying to make, which is that the $600 million of available liquidity that we had today is not just sitting there not earning anything for us. It's draw potential that we have. I simply made the point that I think, as in many other aspects of the business, we are opportunistic. To the extent that we find capital at attractive rates from diversified funding sources we would seek additional capital, just as we did during the third quarter when we, in essence, accessed another $200 million in capital through leverage on our lower-tier credit card offering.

But of that $350 million of leverage that could be applied toward the subprime product, how much of that is actually being used at the moment?

We disclosed at the end of September that $150 million was drawn on that --

Oh, it's fully drawn? Okay.

No. $150 million of $350 million is drawn.

My last question, over the past year we have seen a lot of expenses going through an R&D of new products. Is there anything in the hopper you guys might want to share with us that could be something we could look forward to, seeing some bottom-line results out of an '07?

I think what we're hopeful for is -- it's like an earlier question saying that there seemed to be at least some positive momentum in some of these other things. What we're hopeful is this R&D effort is going to be spun out within the storefront business, within the auto lending business and the like, so that we see increased results from those entities.

We get into a lot of details of kind of everything that's happening within the other segment beyond what we mentioned in the conference call today. In the 10-Q we talked through all that. Some of the consumer lending that we're doing, the centralized decision engine, some of the alternative lending products that we have developed -- so there's a lot more detail in the 10-Q as to the activity there.

Barry Cohen, Merrill Lynch.

Could you give us a better sense, just walking through the margins, the changes in the billing practice? It was hard for me to understand it from a margin perspective because I generally look at [the thing] as an adjusted margin, your all-in margin versus one versus the other. Could you give me a better sense of how that plays out?

In the future what will happen -- effectively, the change that we made is a change for all new accounts that will be rolling into the 90-day past due bucket. So, it's substantially all credit card accounts that will be rolling into the 90-day buckets, and this was predominantly kind of a systems issue in terms of how you program for this, will not have any charges, finance charges or fees, assessed on those accounts going forward.

What effectively happens is, the way you look at it, your total margin will be at -- your gross yield, your net interest margin, your other income, your fees, each of those stats will be depressed in the fourth quarter as new accounts roll in, say, bucket four, those new accounts rolling into bucket four won't have any finance charges or fees charged on them. The accounts that were in bucket four before we made the system change will now be in bucket five; they will have finance charges and fees assessed on them.

So you will have this tiering effect that will go on for the next couple of quarters, and then beginning in the first quarter of next year, you'll start to seeing finance charge and fee charge-offs drop off, here again, on s stage bases as the accounts that were in particular buckets work through their cycles, depending upon whether the fees were charged on those accounts or not. So, it is a timing manner, predominantly, other than with respect to which of the delinquent accounts you ultimately do, are able to salvage. That's a really small percentage.

So that a couple quarters out, you're just going to have kind of lower yields at the top line but also lower charge-offs offsetting those yields to come down to your net yield numbers.

I'm just trying to get a handle on it a little more, first I guess, before I ask this question I should say I think the fact that you guys had come to a determination of issuing some forward-looking guidance, I think, at least for us is much appreciated. I think a lot of other people who invest in the stock probably feel the same. So thank you for listening to us, I know that probably was a high-level conversation, given some of the other issues.

With that in mind, though, how you think about cash generation? One of those things that we have been thinking about is how cash degenerative the Company is. I wanted to have maybe a better understanding about how you think about cash generation on an enterprise level.

At a high level, I hope we don't generate cash because it means that we're finding a heck of a lot of good opportunity to invest the cash.

I meant more in terms of a dollar basis, not necessarily a utilization basis.

What I'm saying is, if our portfolio grows at a rapid rate between the marketing dollars and the capital we will use in those portfolios, we will burn through most of the earnings that we get.

We would hope that the collections that come in from the credit card accounts will be fully absorbed by new cardholder purchases, serving expenses, marketing expenses, as we continue to add further purchases to the accounts.

So I would not look to have free cash flow generated from our business in 2007. Now, if we saw something and we said, the economy is turning down or what have you, we're going to slow down growth a good bit, then of course you would have some cash being generated. But our current forecast is looking at using the excess cash generated from our business to grow more business.

Maybe I'll ask a question in the most simplest way. If you made $4.00, do you think you make $4.00 in cash or do you think you make $4.20 in cash or do you think you make $3.50 in cash? I chose $4.00 as an arbitrary number. It could be anything you want.

I believe that if we make $4.00, that the net asset value has gone up $4.00.

That answers my question.

Looking at our statement of cash flows hopefully provide some insights into the cash that is being generated from operations before the various investment and reinvestment decisions that we make, as we have discussed earlier.

Joel Houck, Wachovia.

This is [Jeff Scolerate] for Joel. A question on the delinquency rate. Just wondering if you could identify the portion of the increase that was driven by the structural change versus underlying credit trends.

Insofar as the lower-tier credit card product offering, I don't know how to really bifurcate that piece out between one or the other, although our belief is that as we look at our vintages, they're all performing well against what we have mapped out and what we would expect the performance to be from a delinquency in charge-off perspective. I guess what I would have to tell you is we don't give a lot of guidance on a portfolio-by-portfolio basis. But as we look at it, the overwhelming majority of it is just mix change toward that lower credit card offering, that lower-tier credit card offering.

As to how much that lower-tier credit card offering is impacted by the general economy, we don't see any surprises there relative to what we anticipated in the curves upon which we built the models that underline that offering. So we say that there's not a whole lot affecting that particular product.

Last question, just a housekeeping. Is 100% of your payday lending revenue recorded in Other Income?

Yes, that is the revenue that is presented in that category.

[Casey Ambreck], Millennium.

It looks like third quarter was pretty clean. Fourth quarter is pretty noisy, so we're kind of almost there. 2007 it looks like the numbers you have comfort in [423], that's good. I was just wondering if you could kind of help us go through what gives you comfort with that number.

Well, I think that at a top line level we are more comfortable looking in the next year in terms of our organic business than we have been in the last several years, really, because we have had, over the last few years, had much more of our earnings generated from portfolio purchases and the like. While we still are generating some income from portfolio purchases, it has become a smaller and smaller piece, and it really is an organic business that we can look to and have a lot more clarity as to how that is going to perform based on the way we have seen the organic business perform over the last two years. We know that the vintages are coming in kind of where we modeled them to better, and so we have every expectation that our response rates and our marketing and all will work as well going into next year as over the last 18 to 24 months.

So I think it's much more one of our organic business as well as some of our newer businesses that we didn't have as much clarity into a year ago or 18 months ago. We feel like we've got a better handle on the auto lending business, we've got a better handle on the retail storefront business, and we're hoping to grow from where we are. But I think we've got some level of comfort as to where those things are going to play out next year.

If you were to get opportunistic, if something were to -- because this guidance does not include like anything happening with CardWorks or any other acquisitions that are acquired, right?

This is not contemplating a big acquisition or anything.

What about buyback, though? In your capital generation right now, I mean you're going to be close to $700 million, by then. I know you've talked about it a few times today. But let me ask you this way, without trying to pin you down too much. How big are you going to let that number get to before you feel like you have to put it to work?

It is more one of, are we really not seeing other opportunities to use the money? If we had gone six months and not looked at a single thing, I would say, well, let's be buying some of our stock here.

Just because you're not even seeing any opportunities?

Right. We're looking at opportunities.

So you're seeing stuff right now; it's just (multiple speakers) a little off --

And some of them are pretty attractive. So it's not one where we're just kind of sitting back and waiting for something to happen. We have, over the last six to nine months, looked at several opportunities. Unfortunately, we haven't closed one, but we are hopeful that some very attractive things show up over the next six months.

Any update on CardWorks?

CardWorks, as I mentioned before, we've got an ongoing dialogue and good relationship. At some point, when the FDIC decides what they are going to do with the ILC industry, we will certainly look to open those back up and perhaps do something. But not a great deal that we can do at this particular juncture.

Thank you. Good quarter.

[Cyrus DeBeak, Cedarhill Capital].

A question I had was regarding the over-limit fees that you guys are currently testing out. Is that something that in the same way that the finance charge and fees on the 90-plus accounts are going away? Is that something that could possibly go away for good as well?

The second part of that, was the reason for testing of that the same FDIC guidance?

Yes, I think the testing that we did in both areas was in response to routine exams of the various banking partners by the FDIC. Various of our banking partners issue cards on our behalf; and, as David mentioned, our willingness and desire to be proactive based on the general industry issue that's out there on minimum payments overall.

On the over-limit fee billings, it is possible we may make changes there in the future. Certainly, I guess for any late-stage delinquent accounts, that issue has been made moot by the decision not to bill any fees on accounts that are significantly delinquent.

So we've covered a lot of the over-limit changes that we might contemplate making in the future, based on the finance charge and fee billings on delinquent accounts, not billing those any longer.

We may do something in the future, and we will certainly let you guys know if we head down that path and want to disclose, at least we're doing some testing about it this quarter and the impact that it had on our current quarter.

So just to be clear, currently on 90-plus accounts, the over-limit fee is still charged, then?

It will not be charged for any accounts over 90 days past due as they roll through the delinquency buckets, as I talked about before.

Could you give any indication like the over-limit fees, the finance charges and fees associated with the 90-plus accounts -- approximately how many basis points that would cut into the NIM?

Well, the over-limit fees are not part of the Net Interest Margin, they're part of the Other Income Ratio. We did discuss about $14 million [of] impact associated with the decision not to bill finance charges and fees on late-stage delinquent accounts; that's probably the most that I can give you at this time.

If you could also tell me, the lower-tier card -- I know somebody asked this before. Can you give any guidance at all with regards to delinquencies or losses on that portfolio?

I think we tried to get a little bit in the conference call dialogue. Effectively that kind of for the foreseeable future as our mix continues to change towards a greater [weighting] of those accounts away from the other credit card accounts that we have, we see both delinquencies and charge-offs increasing. But, as we've said before, the margins on this account are quite attractive and we're certainly very pleased to continue that mix change.

Are you securitizing any of these lower-tier accounts? Are they in any of your master trusts?

The lower tier accounts are financed through a structured financing facility that does not qualify as an off-balance sheet FAS 140 securitization. They are in a trust through an essentially kind of private investor banking partner that provides financing.

Can you give any indication for the other income line item? Are most of the fees associated with the lower-tier card, for example, the up-front $150? Is that all being funneled into the other income line item?

Yes. There is a discussion in the Q about the components of the other income line item, but you're correct; it does include annual fees which are spread over a 12-month card period, activation fees, monthly maintenance fees, NSF fees, cash advance fees, over-limit fees and the like.

So everything, all the fees associated with the lower-tier card, apart from finance charges and fees, are going into the Other Income line?

Well, you've got finance charges and late fees in the Net Interest Margin line item and all other fees going into the Other Income line item, not only for the lower tier card but for all of our credit card products.

Ladies and gentlemen, that does conclude the time that we have for questions and answers today. Thank you for your participation in today's conference. This concludes today's presentation. You may now disconnect.