Atlanticus Holdings Corp (ATLC) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2007 CompuCredit earnings conference call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session at the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this 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.

Thank you. Good afternoon and welcome to CompuCredit Corporation's second quarter 2007 earnings call. Before we get started, I'd 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 development, such as the performance of our credit card receivables including new account growth, net interest margin, other income ratio and charge-off levels, financial performance and growth expectations for all of our business segments, acquisitions of portfolios, assets or complementary businesses, our expected levels of marketing expense, expense control, capital rating plans, 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 June 30, 2007. Thanks again for your interest in CompuCredit. Please feel free to contact me if you ever have any questions you would like to discuss. You may also access our website to obtain a hard copy of the press release and our financial statements to view our risk factors or solicit an archived version of this call.

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

Thanks, Jay, and thanks to you all for joining us. Today we'll review our performance during the quarter, update you on the current state of our business and share some thoughts about our outlook. I'll also spend a little time discussing our views on the economic outlook of our business and the performance of the subprime credit card customer versus the subprime consumer mortgage products.

J. Paul Whitehead, our CFO, will follow me to 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. This afternoon, we reported managed earnings for the second quarter of $12.3 million or $0.25 per share, principally due to loan loss reserve buildup on our high yielding lower tier credit card products, our online microloan receivable originations and our rapidly growing but still immature auto loan originations.

Within our auto finance segment, we posted an $11 million GAAP loss or $0.23 per share. Our core business largely performed in line with our expectations. Our new account growth had a record quarter and we continue to see great pockets of growth opportunities for a variety of our products. However, as we noted in the 8-K that we filed last week, we had one large unexpected item related to our core business as we experienced $16.3 million in after-tax losses on investments that one of our subsidiaries made in a portfolio of third party asset-backed securities.

Obviously, we're unhappy with those losses. Up until the second quarter, we've been pleased with the returns generated from these investments. However, these gains were erased in the second quarter along with a portion of our initial equity investment due to all of the turmoil in the market for mortgage related and other asset-backed securities, which started with the Bear Stearns hedge fund liquidity problem and has expanded based on the leverage and liquidity constraints facing many other market participants.

The market for our remaining portfolio of third party asset-backed securities is somewhat volatile and we may experience further losses. We are also seeing many situations, however, where the trading values of asset-backed securities are lower than what we believe a discounted cash flow analysis and valuation would support. This obviously creates opportunities in the market. Additionally, and most importantly, our total pretax exposure was $45 million at quarter end as all of the leverage undertaken by our subsidiary to facilitate its investments is recourse only to individual underlying securities and is nonrecourse to both the subsidiary and to CompuCredit.

Over the last few weeks we've received numerous questions about this investment from investors. I'd like to give you a quick synopsis of our thought process and our history with this investment. We began to study this asset class in 2001, when a couple of credit card backed bonds became distressed. Our view was that we brought a unique ability to analyze a credit card backed bond because of the performance that we could see in the market for similar types of assets that we may have had on our books.

We also believe that by watching the performance of our customer base, we gain unique insight as to what the short to medium-term economy might do. This has proven to be the case since we started the Company in 1997. When we begin to see trends on both a portfolio basis and a vintage basis on delinquencies, payment and purchase rates, those trends have tended to reflect what the overall consumer economy is doing six to 12 months after we begin seeing the trends.

As we mentioned in the 8-K last week, we began making investments in this class of assets a couple of years ago. This was after we had been monitoring the asset classes for several years. We made the investment with a little over 5% of our book value and we believed at the time it to be a prudent use of our capital. Our current belief is that the market for these -- for most of these asset backed securities is somewhat inefficient and that the market is somewhat irrational. We believe this because of the dislocation caused by huge amounts of subprime mortgage paper that have fallen under pressure. While the cash flows that are being generated from our bond investments continue to be strong, we believe that the market could remain in a state of turmoil for the foreseeable future.

Finally, as I said on the conference call earlier this year, we have seen no meaningful impact on the credit quality of our customer base because of the subprime mortgage issues. As I indicated on that call, that is probably due to the fact that a large percentage of our customers are not homeowners.

Turning to some of our key managed ratios, our net interest margin increased 100 basis points from 17.9% in the first quarter to 18.9% in the second quarter, while our other income ratio dropped from 15.8% to 12.3% as it included the effects of the ABS bond portfolio losses I just discussed. As computed without the effects of ABS bond portfolio activities in both the first and second quarters of this year, our other income ratio would have risen from 15.2% to 15.5% between the first and second quarters of this year.

Our April UK credit card portfolio acquisition contributed to an improvement in our adjusted charge-off rate from 12.5% in the first quarter to 9.2% in the second quarter. Some of our approximately $200 million in purchase price discount on the UK portfolio is allocated as an offset to the face amount of principal charge-offs in determining our adjusted charge-off rate. So that creates the delta you see between the net charge-offs and the adjusted charge-offs.

Also, we have already seen early benefits within the UK portfolio from the not yet completed implementation of our proprietary system for collection and account management strategies within the UK. In our first few months since the acquisition, we've experienced significantly better than initially expected UK portfolio performance, measured principally in lower-than-expected charge-offs of principal finance charges and fees. Needless to say, we are very encouraged with our results from this portfolio as well as our other forays into the UK.

We have focused a tremendous amount of effort on the integration of our international credit card operations and several of our risk management marketing collections and operations people are working in the UK to transfer as much knowledge as we can to our new UK employees. We are tracking our UK cardholders' behavior very closely as we anticipate being able to originate credit cards within the UK by the end of this year. We see the UK consumer credit environment stabilizing, at least insofar as our credit offerings, and I anticipate reporting good things from our UK operations in the coming quarters.

Continuing now with more on our credit card segment, we ramped up our marketing spending as expected in the second quarter and almost doubled what we spent in last year's second quarter. We were very pleased with our new account originations and activations. Companywide, we saw a net increase of over 1 million new accounts between March 31 and June 30, most of which are associated with our credit card segment including a little over half of which came from the UK portfolio acquisition.

Our credit card segment's period end managed receivables grew quarter over quarter by about $1 billion to $3.5 billion, which represented just over 90% of our companywide managed receivables at the end of the second quarter. While loan growth has been a challenge for some in the credit card industry, our offers continue to be met with great acceptance in the marketplace. Between March 31 and June 30, our portfolio of lower tier credit card receivables grew over 21% on our balance sheet from $788 million in gross receivables at March 31 to $957 million in gross receivables at June 30.

While direct-mail and telemarketing continue to be the biggest parts of our credit card marketing efforts, the Internet and television have proven to be valuable, efficient and significantly growing channels for us in reaching new customers. New product offerings, investments in underwriting infrastructure and intercompany cross-segment knowledge transfer have enabled us to leverage our new Internet and TV channels and be very comfortable with the credit risk that we assume through these channels.

With our innovative marketing techniques and card products along with the strong employment market and seemingly good overall health of the financially underserved consumer, we are very comfortable with marketing our cards at higher levels than at any other time in our history. Again, we never grow for growth's sake and if the environment changes such that we are not comfortable with the returns we are earning on our marketing dollars, we obviously will pull back as you have seen us do in the past. With our management team owning over 60% of the economics of every transaction we undertake, we simply have to focus on making sound ROI based decisions. Fortunately, the environment right now is allowing us to make such decisions and grow our credit cards business significantly.

Moving on to other segments, Jefferson Capital, our investments in previously charged off receivables segment posted another solid quarter of earnings, growing pretax GAAP income to $10.9 million, a gain of 65% over the second quarter of 2006. While much of Jefferson Capital's growth came from increased volumes of charge-offs that it is selling to Encore Capital, under its five-year $3.25 billion forward flow agreement with them, Jefferson Capital's balance transfer program and Chapter 13 bankruptcy servicing activities also have had nice growth. We expect to see similar growth from this segment in year-over-year comparisons as supplies of charge-offs increase and the balance transfer and Chapter 13 activities continue their growth.

With our first quarter ACC and JRAS acquisitions, our auto finance segment now includes loan origination activities through franchise auto dealerships, our acquisition and servicing of auto loans from third party buy here/pay here dealers, and our sales of autos along with our financing of these sales from our own buy here/pay here retail lots. Because all of our auto loan origination activities are immature but growing at a rapid rate, the buildup of loan loss allowances under GAAP is depressing our auto finance segment GAAP results. Assuming that we continue to grow our loan originations as planned, we expect continued GAAP losses for the auto finance segment for the next several quarters.

Fixed costs and investments we are making in these various origination activities in anticipation of long-term growth have also served to contribute to the second quarter GAAP losses we experienced within the auto finance segment. As an example of some of these activities, we have increased our origination activities by expanding franchise dealer relationships and opening our fifth buy here/pay here retail location in the second quarter, including our flagship dealership just outside of metro Atlanta. We also have plans to open two more retail locations in the third quarter with further Southeastern US expansion on the horizon.

Lastly, we have continued to see some contraction in our acquisitions and servicing of auto loans from other third party buy here/pay here dealerships, reflecting what we believe to be a variety of less expensive sources of capital available to these dealerships. Based on the glut of liquidity available in the marketplace, our own buy here/pay here dealerships seem to have a wide availability of capital options at attractive pricing and terms, and we can infer that other third party dealerships do as well.

We know that this particular part of our auto segment activities will see growth potential ebb and flow depending on the overall liquidity markets, and what we are concentrating on here is our ability to align expense levels with greater variability in our receivables levels. We implemented a number of expense reduction initiatives in the second quarter, some of which won't reach savings potential until the third quarter and beyond. And we will continue to focus on being able to rightsize expense levels to match our receivables levels.

Turning to our retail microloan segment, receivables, revenues and profits were up from last year's second quarter even with the lower store count due to last year's bank model state store closures. We are very encouraged by all of the per-store metrics we are seeing. And our multiproduct strategy is working well for us, particularly in Texas, where we have opened 25 new stores so far this year and plan on adding at least 24 more by the end of the year. We also have the four storefront locations in the UK that have outperformed our initial plan. And we are focused on our retail storefront expansion plan there and have had teams on the ground the last few weeks scouting new locations.

To conclude the segment discussion, we saw the loss in our other segment decrease relative to both this year s first quarter and last year's second quarter. Again, we typically have products and services that are startup in nature housed in this segment. We have improved operating efficiency in this segment and maintained our focus on controlling costs in the segment while allowing our teams the resources they need to execute current business plans and explore and create new opportunities.

We received a boost within the other segment this quarter when we purchased MEM, our UK based online lending operation. Our US online lending initiative also is getting off the ground with a variety of installment loan and other microloan offerings and is quickly growing its receivable bank. To this extent you can expect our other segment to experience the same GAAP allowance for loan loss phenomenon that we mentioned for our auto finance segment.

With every online loan that we make, we immediately increase our allowance of loan losses and immediately recognize GAAP losses. While in accord with GAAP, this treatment gives no value to the significant economic earnings potential of every dollar invested based on the high levels of returns on assets and equity that we believe to be inherent with our online loan assets. As such, considering the rapid growth rate that we expect for our online receivables, one should expect to see GAAP losses in the other segment for the foreseeable future. Given these dynamics, we will be focusing on the performance of underlying vintages of online loans which will be reflected in our managed receivables statistics on our rate of receivable growth and on the efficiency of our cost structure in measuring our success for this segment.

In conclusion, we are focused on near-term execution within each of our segments. While improving our long-term positioning, as a diversified consumer lender to the financially underserved, as we have often stated in the past, our focus is on return on equity and not on the level of smoothness or consistency of our GAAP earnings results. Several of our initiatives are at stages of their lifecycle and growth rates at which they will be generating GAAP losses for the next several quarters. And we are entirely comfortable with this as long as we are receiving and forecast to continue receiving our desired returns on equity on a cash-on-cash return basis.

As we are all aware, there has been a great deal of uncertainty across many asset classes over the last few months. We continue to see good opportunities in the market for organic growth for our businesses. During our history, some of our better portfolio opportunities have come during times of uncertainty in the market, so we are hopeful that we might be able to augment our organic growth with some potential portfolio purchases either here or in the UK over the remainder of the year.

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

Thank you, David. First I'll review some of our key financial operating and statistical data and then delve into more details on our financial performance. To recap our results for the second quarter, we had a GAAP net loss of $11 million or $0.23 per common share. We also reported managed earnings of $12.3 million or $0.25 per share. In terms of our key managed statistics, our net interest margin was 18.9% for the second quarter of 2007 compared to 17.9% in the first quarter of 2007 and 23.7% from last year's second quarter. Our other income ratio was 12.3% in the second quarter, down from 15.8% for the first quarter of 2007 and 16.9% from last year's second quarter.

Our adjusted charge-off rate was 9.2% in the second quarter compared to 12.5% for the first quarter of 2007, and 8.3% from last year's second quarter. And our 60 plus days delinquencies rose from 12.8% as of March 31, 2007 to 13.2% as of June 30, 2007.

Our net interest margin improved from the first quarter as we emerged from the transitional effects of last year's program change whereby we discontinued billing interest and fees on credit card accounts becoming more than 90 days past due. In the first quarter, we still had charge-offs from accounts that were billed interest and fees prior to the implementation of this change while we had no offsetting billings of interest and fees on accounts that became more than 90 days past due after implementation of the program change. That's no longer the case, and given our current growth plans and our continuing mix shift toward lower tier credit card receivables, we expect more upward movement in our net interest margin over the next couple of quarters.

Reflecting David's comments about our subsidiary's losses on a portfolio of third party asset-backed securities, our other income ratio dropped unexpectedly in the second quarter. As computed without considering any future potential gains or more likely losses on these securities, we would otherwise expect to see our other income ratio increase in the remaining two quarters of 2007 with our continuing mix shift towards our lower tier credit card receivables.

Our net charge-offs increased from the first quarter, while our adjusted charge-offs decreased quarter over quarter. The UK portfolio was the main catalyst for these movements in our charge-off rates. We knew going into the purchase that there would be a large number of accounts near default status that had little or no chance of being collected, and that was obviously reflected in our purchase price. Those charge-offs increased our net charge-off rates but were largely offset by credit quality discount when arriving into adjusted charge-offs. We expect to see lower net charge-off rates over the next couple of quarters as our UK credit card receivables portfolio normalizes and we grow organically.

However, after the third quarter of 2007, we expect to see a gradually increasing adjusted charge-off ratio as the gap between our net charge-off ratio and adjusted charge-off ratio narrows, with the charge-off of cardholder purchases that we have funded sterling per sterling since our acquisition of the UK portfolio.

The 90 basis point increase in our adjusted charge-off rate from the second quarter of last year to the second quarter of this year predominately reflects the ongoing effects of our receivables mix change toward a greater percentage of our receivables being comprised of those associated with a lower tier credit card offering. Similarly, the 40 basis point increase in our 60 plus day delinquencies since March 31 reflect the same phenomenon. We should also note that we have seen some increase in delinquencies which we expect to contribute to higher future charge-off levels, all other factors being equal, associated with certain changes to our collections programs and practices during the first two quarters of 2007 in response to comments from the FDIC about negative amortization. That being said, we continue to be quite comfortable with credit quality and the financial health of our consumers.

While we seldom speak in our conference calls about some of the assumptions that go into our FAS 140 securitization valuation models, I did want to draw your attention to the sizable 530 basis point increase in our disclosed expected principal credit loss rate between December 31, 2006 and June 30, 2007. Substantially all of this increase is attributable to our UK portfolio acquisition for which our FAS 140 valuation models reflect our use of a charge-off rate based on the expected face amount of principal charge-offs, which equates more to our managed net charge-off rates.

Whereas our credit quality discount serves to reduce our net charge-off rate in arriving at an adjusted charge-off rate in our managed receivable statistics, our purchase price or credit quality discount on the UK portfolio acquisition was effectively taken into GAAP earnings in the second quarter through gain on sale accounting and it will not reduce the face amount of expected future principal charge-offs in our ongoing FAS 140 valuation models.

Turning now to our expense items which are similar for both GAAP and managed earnings. Our second quarter marketing expense of 50.9 million increased 14.3 million over the prior quarter. And we just about doubled our marketing investments relative to last year's second quarter level. We've been pleased with our response in card activation rates and expect marketing spend in the third and fourth quarters to average somewhere between the expense we incurred in the first and second quarters of this year.

Within our marketing expense category, I would like to highlight the beginning of the second quarter and for all prior periods presented, we began to reclass a portion of card and loan servicing expense to marketing and solicitation expense. We made this reclassification to appropriately reflect as marketing expenses certain costs that we incur which are particularly significant within our new Internet and television channels between the time that a customer accepts our solicitation, which we refer to as the time of account booking and the time of cardholder activation, which generally corresponds to the point in time that we recognize an account as existing for accounting and revenue recognition purposes.

For example, some of our card products require an activation payment before the credit limit on the card can be accessed. Any expense incurred on an account prior to the receipt of the activation payment has been reclassified to marketing expense. Given that some percentage of consumers accept our offer, which results in the account being booked in our system, but then decide not to activate the card for one reason or another. The costs that we incur once an account is booked, including phone calls, statement printing and mailing, and card fulfillment are all part of the marketing effort for those cards that do ultimately activate.

Similarly, such costs that we incur on accounts that are booked but never activate are part of the marketing costs of those accounts that do activate. We must consider these costs in making our economic determinations of activated account profitability. To this extent, these costs are no different than printing and postage costs we incur on non-responders. In the direct-mail channel, they get factored into our response rate determinations and average cost per account calculations for those consumers who do positively respond and obtain one of our credit cards.

Our UK portfolio acquisition caused a direct decline in our operating ratio in the second quarter, as our UK credit card portfolio comprised of accounts with larger account balances than those of the receivables associated with our lower tier credit card product. Accounts with higher average balances cost much less to service when measured as a percentage of receivables. Take the customer service call on a $300 balance account versus a $1,000 balance account for example. Even if the time and cost of that call are equal, costs will be much greater as a percentage of receivables for the $300 balance account.

As the UK portfolio liquidates, which it has already begun to do, our operating ratio will again rise given our ongoing mix shift towards a greater percentage of our receivables being comprised of those associated with our smaller balance, lower tier offering.

Our 10-Q filed today sets forth several reasons for our differing second quarter GAAP income levels between 2007 and 2006. I'd encourage you all to review our second quarter 10-Q filing for additional details underlying each of the many factors affecting our reported GAAP earnings. Again, as we have stated in the past, our focus remains on making good economic decisions that will result in high returns on equity to our shareholders over a long-term horizon, even if these decisions may result in volatile GAAP earnings such as in the case of incurring significant marketing expenses in one particular quarter to facilitate expected future long-term growth and profitability; or in the case of gain on sale accounting requirements for securitizations under FAS 140; or in the case of our building up of allowances for uncollectible loans and fees receivable on product offerings that have significant earnings streams and economic value relative to their GAAP book value.

On the subject of liquidity, we had approximately $300 million of available liquidity at the end of the second quarter. Our available liquidity is the product of our unrestricted cash combined with untapped funds available through our securitization facilities that are collateralized by our current asset base. Baselining this amount against the $425 million available liquidity balance that we disclosed in our last conference call, one can note the rate of cash investment that we're making in our organic growth efforts. And based on our current marketing and organic growth plans throughout the remainder of 2007 and beyond, we plan to supplement our approximately $300 million of available liquidity before the close of 2007 through securitization or other financing facilities.

Overall, we're pleased with the fundamentals of our core businesses. While our results in the second quarter included the effects of a generally favorable economy and a good credit quality environment within our sector, we see nothing in this data to suggest any material changes in our third-quarter credit outlook.

Our managed earnings expectations for the second half of the year remain strong and we estimate that we will earn between $1.35 and $1.50 per share during the third quarter, and between $1.65 and $1.80 per share in the fourth quarter of this year. The monthly increases we have seen over the first several months of this year support our thoughts on the remainder of this year.

Also, given the volatility of underlying markets and our inability to control those markets, our estimates do not include any potential income or loss associated with our portfolio of third party asset-backed securities.

Let me conclude now by thanking you all on behalf of both David and me for your interest in CompuCredit and your participation in our second quarter earnings call. With that, we'd be happy to address any questions that you may have.

(OPERATOR INSTRUCTIONS) Dan Fannon, Jefferies.

Can you please walk me through where the charge for your investment in those assets with the asset manager showed up in both -- in all the GAAP on a managed segment as well as in the individual segment data that you break out in your press release?

Sure. In the GAAP financial statements the charges there are on the fees and related income on non-securitized assets line item. And in fact there's a detail -- a further detailed breakout of that particular income statement category in the notes to our financial statements, in Note 1 to the financial statements. And it's actually classified within the other category of that particular detail of that account balance. Actually it's in Note 2 of our financial statement.

As far as the segment information goes, we have always considered those particular activities to be part of our credit card segment as the genesis of those activities was with respect to our knowledge of the credit card ABS markets, as David had mentioned. The initial investment was really considered one in which we decided to park some capital that we had into this endeavor within the credit card segment.

Okay, and so for the $0.25 in managed earnings we should be able to back that out to kind of come up with a core earnings number?

The only differential you'd have is we'd actually factored into our second quarter guidance some gains on the portfolio which was consistent with what our historic experiences had been. So you'd have to kind of look at that history and add that in as also another differential.

Okay, can you help us understand the relationship with this -- with John Devaney in particular as well as the investment you have going forward? I mean how should we look at -- will we be getting an update potentially next quarter if you guys make additional investments? Or how closely are you looking at that as a use of capital in terms of deploying more capital into those types of vehicles?

We are keeping a close eye on the potential to use capital. I'd say it's not likely or unlikely that we will use any capital -- use any additional capital there. Your question about -- and yes, we will give you an update next quarter as to where things stand there. Your question about the relationship with John Devaney and United Capital Markets, we started -- we were introduced to John Devaney and United Capital Markets back in 2001 when he came to us to help him analyze some bonds from -- at the time I think they were Spiegel bonds and [metrics] bonds and things like that in 2001 and 2002. And have followed his investing and followed a lot of his asset backed activities over that time. But that's really the only relationship. There were some questions -- he had purchased some CompuCredit stock at the end of last year and the beginning of this year, a fairly large piece. And we made an independent decision to buy some of that stock from him and some of his entities in the first quarter, I believe. But those were all just separate transactions with an individual that we'd come to know over the last six years.

Okay, that's helpful. And then lastly, you made some comments that your UK portfolio is performing better than expected. Is there any way to separate that portfolio and kind of back into what it contributed in the quarter in terms of managed earnings?

I guess looking at some of the tables that we provide within our credit card segment and looking at the balances of accounts that we have on balance sheet for our lower tier product offering, you can glean a little bit about the growth in our receivables level. And then knowing a little bit about the historical performance of the credit card segment, you can probably gather some data there. We don't really publish by portfolio data specifically but suffice it to say that it has significantly exceeded the initial estimate that we gave in the last quarter, I guess of $0.15 to $0.20 or so per year.

I think our -- the reason we wanted to mention that specifically is because I think that we had, I believe in the first quarter, we had talked some about our expectations for the portfolio. One of the reasons we bought the portfolio was to give us infrastructure from which we could build out a new origination machine. And so we probably had a little bit less of an expectation in terms of portfolio purchasing as we've traditionally expected in portfolios that we purchase here because we were not only getting to buy the portfolio but also getting the infrastructure to do business over there. Fortunately -- and the reason for the commentary is, as J. Paul said -- fortunately, the early results have turned out to be a little better than what we thought.

Sameer Gokhale, KBW.

I just had a question to you, Paul. I think you were talking about some of the different margin trends in other income. And I recall I think you were saying that you've worked through the effect of the accounting change on the billing practice on your NIM. And you expect the (inaudible) margin to expand going forward. And I think you'd also said that you expect the other income ratio to also increase. So I was just wondering, and it seems like if you increased the marketing of fee-based cards, my understanding is those cards may have a little NIM or other income ratios. So how are both those metrics moving up in the same direction? Just some clarity on that would be helpful.

Yes. The lower tier product has a lower APR than our more traditional core products, but it has obviously a much greater level of delinquency and late fees actually are factored into the NIM calculation rather than as a fee item. And that obviously has some effect on your overall net interest margin.

Okay. That's very helpful. And then you'd given some good commentary about your guidance for the next couple of quarters. I was just trying to reconcile that. I think with your earlier guidance of I think earnings for more than $4 a share for the year because of some of those charges related to the securities portfolio, but now you've given guidance for the next couple of quarters that don't factor in the guidance. You have about $0.63 I think in managed EPS this quarter excluding that charge. So when you put all the guidance together and the first quarter numbers it seems like, is the guidance kind of changing to maybe $0.25 to $0.35 below what your original expectations were and what is driving that in your view?

I guess the guidance for the last couple of quarters has dropped a bit from the last call. I think there's a couple of predominant factors there. One is the removal as we mentioned -- as I mentioned -- of any of the bond related activities for which we had forecasted gains based on our historic results there in the third and fourth quarter this year. We're also expanding a little bit more in the UK and expect to incur some higher costs there in the UK. We've also, as I mentioned, seen a little bit of an increase in charge-offs associated with some of the negative amortization changes that I mentioned that we've made.

So, there are a variety of smaller factors. We still feel very good about the trend and where we're headed and I think we have a lot more visibility now than we had earlier, as to the activation rates on our Internet generated accounts and how that is playing out. And we are actually seeing the ramp up month over month in earnings based on the marketing efforts and the successes we're having there.

Okay, that's a really helpful commentary. And then just my last question. Dave, perhaps you can comment on the pricing of the charged off at collections market, if you're seeing any material change there, anything that might excite you about increasing or ramping up your purchasing activity in the near-term? I think you've talked about your increases and charged off credit card paper, supply increasing maybe you have more of an appetite there. But are you seeing much of an improvement in pricing per se?

We have seen a slight improvement. I wouldn't say it's a material improvement but we have seen the trends come, what we think to be in the right direction a little bit. And if things continue and we continue to see that trend improve a little bit further from what we've seen to date, I think we'd be a more aggressive buyer. It's still not what we'd look at and say this is a great use of this capital, it could be a fair use of capital at these prices. But if it -- we think, as you know from previous discussions, we think over the last year, 12 months ago, that the pricing was getting a little irrational on the purchase side; we think it's getting back into an area where we would play again in the purchase.

I might also add too that with our balance transfer program, if we have folks that actually select -- choose and respond positively to the solicitation whereby we offer a credit card to somebody who is willing to pay their debt, we are seeing enhanced liquidation curves there. They can support the current price levels which is why we're seeing growth in that particular business.

Okay. That's terrific. Thanks, guys.

Moshe Orenbuch, Credit Suisse.

Thanks, I was just wondering if you could amplify on the request between the marketing and talk about what the actual ramp the marketing. And I have a follow up to that.

Moshe, I guess I'm having a hard time hearing you but specifically I guess you're wanting us to give more details on the marketing request? I think it became apparent to us first and foremost that we have a lot greater gap I guess than we've had in the past through the new channels that we had, the Internet channels and the TV channels. Between accounts that book maybe over the Internet and those that ultimately follow through and activate their card. And there has been a huge ramp in volumes and of accounts that have been generated through those channels. And it became clear to us that we consider the cost that we incur within our operations group as part of the economic cost of marketing accounts. And we've got to consider and factor in a return on those accounts based on the economic dollars we put into the marketing and then including the operations costs. We really thought it appropriate to reclassify in our financial statements the cost that we considered internally on whether it made sense to market and whether when an account is activated those are good returns on the dollars we spent. We also --

The question I was really trying to get to is whether you add -- whether the marketing is up from the first quarter levels absent the refinance?

Oh yes. In fact we have reclassified this operating cost to marketing for all prior periods presented. So the first quarter numbers have been bumped up for the effects of this so you can see a valid quarter over quarter comparison of what the increase in costs have been. In year-over-year.

In terms of that, could you kind of talk about the fact that you are increasing your marketing investment to kind of correlate that to the ongoing issues around --from a regulatory standpoint. Have you learned things about the process around making more comfortable investing more at the low-end credit card business?

I think from a regulatory and the like standpoint, it's more one of internally, as J. Paul said, we looked at it and said it makes more sense to identify all the costs associated before someone actually becomes a customer in the marketing fees. And we didn't want to be in a situation from a managerial standpoint of looking at acquisition costs and not properly looking at that costs in total. And having a cost buried over an operating cost or what have you. It really has had no -- the decision there has had nothing to do with our decision on -- the regulatory environment has had nothing to do on our decision on how to reclass the marketing fees. In terms of -- (multiple speakers)

(inaudible) get caught up in that --

You what?

I was just saying I don't mean to get caught up in the reclass, I just -- before you answered that I just didn't know whether you had actually increased marketing spending. The fact that you did was what I was getting at and can we infer from that anything about your (inaudible) feelings about how the regulators now view the products that you're offering, now that you're actually marketing it more rigorously?

We are and have been since most of our dialogue are pretty comfortable that the regulators have comfort with the product offering that we have had in process for some period of time. So we have not gotten new information or different information over this year. What we have seen is some of the new channels that we have employed have turned out to be working better than what we might have thought six months ago, three months ago, and so we have ramped up our efforts in some of those channels.

Carl Drake, SunTrust.

A couple of questions, first on capital allocation, I wanted to see, you mentioned $300 million of liquidity. You mentioned you might look at securitization markets. Are you referring to -- what types of securitization? These would be off balance sheet securitizations and would these be new assets? And also maybe if you could address the share buyback authorization if that's a possibility for capital as well?

First off on your question about the form of financing that we might pursue or plan to pursue before the end of the year. Certainly a securitization is a possibility in an off balance sheet securitization transaction. We actually discussed that in the 10-Q in our liquidity section of the 10-Q and talk about the implications that that would have on our financial statements. And for the most part if we do head down that path, I think we're looking at taking some of the existing on balance sheet assets that we have and securitizing those, financing those through a securitization arrangement and taking them off balance sheet.

And then on the share buyback?

It's still authorized. And at these prices, we think it's a good buy.

Second question. In terms of -- are there any divisions that you would consider monetizing? You've had some pretty good success in the charged off side. The retail microloan side it probably hasn't come to fruition yet but there's some interesting I guess success in Texas. Is that a possibility at all or maybe you could provide some color on that?

Our whole business and every piece of our business is for sale every day.

Okay, next question in terms of that. What was the update on marketing expenses for the second half of the year? I missed that part. How much -- did you say you would be spending at the same average rate as the first two quarters?

Yes. Just somewhere between the first and second quarter level.

And then on the card program itself, could you provide some color, J. Paul, on gross account growth for the second half of the year and what the makeup of that might look like in terms of near prime low tier? And I think there's two types of low tier as well. And just what kind of gross account growth we're looking at in the second half?

Yes, you know, I don't have the gross account information for the second half of the year with me. We actually, in this particular quarter, we had some questions in prior calls and maybe some confusion between gross and net account adds. We have really decided to focus more on net account growth and looking at net accounts at the end of one quarter versus the prior quarter to avoid any of that confusion. We are also focused obviously on increase in receivables levels, the dollar level of receivables. So I really don't have a lot of color to give you there, Carl.

As to the split between near prime and lower tier, I don't have a lot of information to share with you there either except to say that we are -- and you can see this as you look at our data that we provide in our 10-Q -- are clearly focused more heavily on the lower tier product offering. And we are clearly focused significantly now on the Internet oriented product in that lower tier.

Are there any variations or deviations on that lower tier now that you've gotten up to close to $1 billion of receivables in that, are there any tweaks or adjustments you're looking at, maybe changes to collections practices or marketing or is there anything that you can share color there?

I would just point out that every one of our product lines and all of our businesses one of the things that we think we do better than others is that we are constantly trying to improve both of our account management, our collection efforts, our marketing efforts, the desirability of the products. So we will always have various things in test mode in both the marketing as well as account management. And so there's not a particular one I can point to in the lower tier area. But I can tell you that there are lots and lots of tests that are ongoing in all segments of our business, including I'd add to that actually a wide variety of product offerings in the lower tier that's changed and evolved over time from the first one that we started which was the $300 credit line product.

Okay, just one question on the roll rates. Last quarter you mentioned you're seeing better roll rates in terms of better than expected credit quality and that impacted some of the fee income. Could you give us an update there what you're seeing in terms of roll rates?

As I mentioned, we are seeing a little bit higher delinquencies and a couple of buckets stiffening up. We factor that into the guidance we gave. Some of that is in reaction to some of the changes in our collection practices that we have made in the past quarter or so based on some of the dialog with the regulators on negative (inaudible). And so we -- it's factored in. Certainly the first quarter was unusual and I guess you'll probably recall that we were surprised by the lower delinquency in roll rates and the impact that that had adversely on our fee income in the first quarter.

John Hecht, JMP Securities.

Good afternoon, thanks for taking my questions. A little bit more on the credit. If you were able to sort of just aggregate your portfolio and look at the auto versus the near prime credit card versus the subprime credit card, I guess and then maybe a little bit of the payday buckets and now the UK credit card buckets. You mentioned some pieces in some buckets are performing worse. Can you give us maybe from the product perspective which ones are performing worse and which ones may be performing better to give us a little sense of where that might go going forward?

I think that when we talked about performing worse, we're talking about a fairly small relative difference in some of the delinquencies, primarily on the credit card pieces, in as much as that's 90% of our assets, that's what gets most of our attention in that space. But in the credit card space we have seen a slight increase in some of the roll rates. Not something that would tell us that we're -- have a cause for great concern or the like, but is something that we monitor every single day. And so when we have seen a slight uptick that's why we mentioned it in the script.

But the other piece of that is that we are still at kind of historically low roll rate in delinquencies for the types of products that we have compared to when you look back over the last five years or so. And fortunately, some of the things that I spoke about earlier about the subprime mortgages and things like that and there's a lot that we all read about what's going on in those markets and is that going to have a ripple effect. We have not seen our customer base seem to be affected much negatively by a lot of the things that a lot of people on Wall Street are very focused on. But we've not seen our customer base have much negative impact based on that.

Also John, just to make sure, because I may have led to the confusion and I just want to clarify this, if I did. I did cite in our comments, and David did as well, the fact that certain of our products and certain of our segments are experiencing higher provisions for loan loss within our GAAP financial statements. That is more a reflection not of kind of disparate credit with respect to those various products within the segments, but more a function of the level of maturity of those products in the perspective of how many receivables we have, the fact that we've got significant growth rates planned for those receivables and all of our assets fundamentally are on balance sheet assets in every one of the segments, whether it's auto finance, whether it's the other segment, the online, you know, macro lending products, the installment loan online products or our credit card products. All of them have what we believe to be very high returns on asset and ROEs. And GAAP requires that the day you make the loan, if you make a $100 loan, you're going to immediately book a loss when you make that loan because there is no recognition in GAAP unless you have an off balance sheet transaction of the value of the I/O strip or the earnings potential of the asset. So I was really try to highlight that you've got that phenomenon for a number of our segments based on the fact that we're planning big growth and we are growing big relative to a relatively immature size of receivables as exists today.

Okay. That's good color. So in summary on that, if you look at a product by product or FICO band by FICO band, your roll rates haven't changed much, it doesn't sound like they're anything -- not materially in the last several months.

That's correct.

And second question is it looks like your average balance per open account has increased. Is that a function more of the Barclays acquisition? Those are higher than average balances. Or is your credit card customers or as you season them are you extending them more credit and they're using it?

It's primarily the UK.

Dennis Telzrow, Stephens Inc.

I had a question on the -- I think in your 10-Q you show investments in asset-backed securities of roughly 100 million. So a part of that is with the third party and the rest of it you manage internally, is that correct?

Well, there's some further breakout of that item in the NodeStar financial statements as well, Dennis. If you -- here again, go to Note 2 to the financial statements. We actually detail what those various investments are.

All right, I haven't got that far, so I'll look at that tonight.

But fundamentally I guess to your question there's $101 million of investments in the asset-backed securities category that we were referring to in the call that we treat as trading securities that are mark to market. And the balance is either stuff that we're holding to maturity or equity securities that aren't affected by the ABS markets for the mortgage related products.

Fair enough. And last question, and this I dug out of queue -- I think there was a comment about delinquencies in the UK being higher, I think the presumption is they're just an education to us, is that a fair statement?

I'm not familiar with the comment that you've made.

Okay, well, I'll have to read it again and get back to you if it is correct, all right? Maybe I read it incorrectly.

Now, what I did say is that in our FAS 140 models and the disclosures in our GAAP financial statements, there is a significant increase in our expected charge off rate, which really has nothing to do with any change in our expectations on charge-offs for our securitized portfolios. It has everything to do with the fact that we recognized all of our discounts, our purchase price discount, on the UK portfolio as part of our gain on sale accounting. So there's no discount left in those models which means that as you're plotting out your cash flows in your FAS 140 models for the UK portfolio, you're looking at the full face amount of charge-offs, which obviously we have no -- we don't have the full economics exposure to that because we didn't pay full face for it. That has served to cause our expected credit loss rate to rise in that disclosure.

David Hochstim, Bear Stearns.

I wonder could you just go over the trends you were talking about in terms of the net interest margin and fee incomes? And kind of relate the change in managed earnings in the second quarter where you're expecting to be in the third and fourth quarter and sort of how we get from one to the next?

I think fundamentally we're expecting to see a shift up into net interest margin over the next couple of quarters on a gradual basis from where we are this quarter. We are also expecting to see an increase in the other income ratio. Here again, as we've estimated it for purposes of giving the guidance we gave today, without regard to any potential gains or, like I said, more likely losses on the ABS bond portfolio. So absent any activity at all with respect to that asset class, we would see a pretty sizable increase in our other income ratio between now and the end of the year gradually ticking up.

[I] mean excluding the loss from this quarter. So if you didn't have any ABS issues in any quarter you'd still see a sizable increase?

Yes, I think when we factored out the loss we had this quarter we were at 15.5%. And we're still planning to be -- get that north of 20% in the other income ratio after the end of the year.

Could you just review again what the reduction in late fees was in the first quarter and how much of a swing there was this quarter?

The reduction in late fees caused by the delinquencies?

Yes, lower delinquencies in the first quarter was kind of a negative in terms of income because you had lower delinquency fee.

I don't have that in front of me but I'm going to go off recollection that it was about $22 million in the first quarter. I think that's right.

And then delinquencies were a little bit higher this quarter it sounds like? So was there -- there wasn't a negative hit this quarter?

No, no, we didn't have the same unexpected result there that we had in the first quarter.

And then would we expect to see GAAP losses in the second half?

It all depends on as we talk about in the 10-Q what we do with respect to off-balance sheet securitization.

Okay and that would be the big swing?

Yes.

And then finally could you just go over again the growth in accounts and the distortion from the progress portfolio and kind of what's organic and where those are?

It was basically 1 million net new accounts and slightly over half of those came from the UK.

Okay and so that's now stabilized I guess. And so what kind of income growth do you expect in the second half?

There won't be any new accounts from the UK portfolio until we start originating our own credit cards in the UK. So that's going to flat line and in fact liquidate as you look at our net account additions going forward. We still continue to forecast good account growth and a fairly sizable increase in net accounts throughout the balance of the year.

So I mean if we ignore the Barclays situation and the attrition of the accounts there, could we be seeing 500,000 per quarter or more?

You could be seeing that or more.

And what kind of attrition rate would there be on Barclays? Account attrition?

Well, the account attrition is going to -- as with every portfolio we purchase, there are certain accounts that are closed. There are other accounts that we want to keep over the long-term. So the actual account attrition is probably going to be fairly slow because as people pay down their debts over time. And so I wouldn't expect a meaningful drop-off really this year but probably next year we'll see some drop-off in numbers of customers there.

And finally one last clarification question. Could you just review again what you were saying about the returns from the Barclays transaction relative to what you originally guided to? Were you saying it was meaningfully better or --?

The initial results have been a fair amount better than what our initial forecast was in the first few months. Our hope is that that trend of the initial rollout continues for the foreseeable future. And we've got no reason to think it won't but it has come out of the gates better than what we had thought.

I guess originally your guidance was about $0.25 a share contribution?

I think it was like 15 to 20 or something like that?

I thought that's what we -- a fair bit north of that.

Per year, I think, right?

You're saying it's going to be more than that now?

At least we believe so, yes.

Okay. Great. Thanks a lot.

Ladies and gentlemen, that does conclude our time for question and answer today. Thank you for joining today's conference call. The presentation is concluded. You may disconnect your lines and have a wonderful evening.