Atlanticus Holdings Corp (ATLC) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, welcome to the fourth quarter 2007 CompuCredit earnings conference call. My name is Audrey, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS) I would now like the turn the presentation over to one of your host for today's call, Mr. Jay Putnam, Director of Investor Relations. Please proceed, sir.

Good afternoon, and thank you you for joining us for CompuCredit Corporation fourth quarter 2007 earnings conference 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 plans, beliefs or expectations of future results or developments including 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, plans for our Micro-Loan segment, acquisitions of portfolios, assets or complementary businesses, our expected levels of marketing and other expenses, liquidity expectations, capital raising plans, earnings expectations and general economic conditions.

For information regarding some of the 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, 2007. We also encourage you to review updates of these same sections of our 2007 Form 10-K when it is filed within the next several weeks. Thanks again for your interest in CompuCredit. Please feel free to contact me if you have any questions you would like to discuss. At this time, I will turn it over to David Hanna, Chairman and CEO of CompuCredit for his remarks.

Thanks, Jay and thanks to you all for joining us. I will spend a few minutes reviewing results from the quarter and provide an update in our business. I will then turn things over to J. Paul Whitehead, our CFO, to discuss our financial results in greater detail. After our prepared remarks, we will be glad respond to questions you may have. Also joining us today is Rich House. As most of you know, Richard is co-founder and President of CompuCredit. Today, we are going to cover some of the metrics of the credit card assets with more granularity than normal. Rich is here to cover any questions about that area that you may have.

Let me start my remarks by commenting a little bit about our philosophy and the general state of -- especially finance businesses over the last several months. First and foremost, our approach has always been the manager business for the long term. That means that we will always attempt to make prudent financial decisions for the long-term growth of the capital that has been entrusted to us by our shareholders. Sometimes this approach means sitting on the sidelines and protecting the asset base that has been built rather than trying always growth asset base.

Several months ago, when the liquidity markets first began to freeze up for all subprime assets, the first thing that we did was to start to look at scenarios that we might take if the securitization market never came back. While we believe that is extremely unlikely, I wanted to know what would happen to our portfolio if we could not access the same liquidity markets we had used in the past. I should point out that this is not the first time we have looked at this type of scenario. You see we have been through a very similar liquidity crunch for our credit card segments back in 2001 and 2002. We think we have seen the movie before and we think we have a reasonable idea how it will turn out. That being said, I was able to get comfort around the fact our portfolio without adding very many new customers would generate a great deal of free cash flow and provide healthy returns on our initial investments in it.

Unlike some mortgage originators or auto originators, we eat our own cookie and we continue to like the looks of our portfolio. With the uncertainly in the funding markets, we shifted our strategy during the fourth quarter to first and foremost protect the asset value that we have built within the business. Our GAAP numbers reflect a bulk value of over $16 per share and we believe as we look at our portfolios that this is a conservative estimate of the net present value of our cash flows that we think we can generate from our portfolios. In as much as the management team owns more than 60% of the stock in the company, we look to first protect the value already created and then look to enhance that as opportunities present themselves.

We cannot control the liquidity environment and we cannot control the economy. But we can control our cost structure and we can get a very good look at what is happening with our credit card customers based on reviewing payment and delinquency trends over the long term. I can tell you that our customers are acting in what we believe to be a very rational pattern. They have slowed spending so receivable growth has not been as robust as we had thought but most importantly the delinquency trend look promising.

We have nine distinct portfolios we monitor internally for performance. While we have heard subprime issuers speak about deterioration in delinquency trends, we just haven't seen that at the vintage level within our portfolio. We think some of this is due to the fact that our customers average open to buy or contingent liability is a fraction of what it would be with a prime issuers. Secondly, we have reviewed potential mortgage exposure of our customers. We have analyzed this and less than 25% of current customers have mortgage loans. This means that mortgage-related payment stress might negatively affect customers at a much higher rate with a prime portfolio than it will with our customer base.

This afternoon we reported fourth quarter 2007 results and on a GAAP basis we earned $15.8 million or $0.33 per share compared to $9.7 million or $0.19 per share in the fourth quarter of 2006. We are looking only at our continuing operations fourth quarter GAAP earnings were $25.8 million or $0.54 per share as compared to $16.7 million or $0.33 per share for the fourth quarter of 2006. On managed basis, we reported a net loss of $28.1 million or $0.59 per share compared to earnings of $19.9 million or $0.40 per share in the fourth quarter of 2006. We are continuing operations our fourth quarter 2007 managed loss was $18.2 million or $0.38 per share as compared to earnings of $26.6 million or $0.53 per snare the fourth quarter of 2006.

In our press release, we list some items that materially affected our GAAP and managed results in the fourth quarter. The largest of which was a $53.6 million pretax good will impairment charge within our retail Micro-Loan segment. While this charge led us to a managed loss for the quarter, we posted GAAP earnings doing large part to the fourth quarter securitization of our lower tier credit card receivables. J. Paul will review these items in more detail during his comments.

We took major steps in the fourth quarter to position our company to whether on going uncertainties in the global credit card markets and with the view toward preserving our bulk value. As always we take all actions with the focus of building long-term value for all of us as shareholders. Many of my further comments will focus on specific actions we have taken in the fourth quarter toward our goal of preserving the value of our business and at the same time position us for growth as additional liquidity becomes available to us. We continue to pursue additional sources of capital because fundamentally we borrow money to lend money and though we rely on outside capital or business the way we would like we have tailored our current growth plans to match our current liquidity position. Obviously, we continue to monitor events very closely whether it is with the liquidity markets or the behavior of card holders. We have shown in the past that we are a nimble and opportunistic company and we expect to use these traits to our advantage in the current environment. A theme underlying our actions in the fourth quarter is our intense focus on allocating and reallocating our available capital to only those parts of our business that on a proven basis produce the highest IRRs with the lowest level of operational or financial risks.

Accordingly, we have shuttered several as of yet unproven business operations and are in the efforts within our other segment and have discontinued the operations of several marginally to non profitable retail Micro-Loan store fronts. There are clearly times in business when we think that it makes sense to prudently explore new business opportunities, but there are also times when prudence demands that you focus on the core business and wait for better economic guidance to try and explore new areas.

Our lower tier or credit card receivables within our credit card segment have a several year history of producing attractive IRRs for us and represent an area to which we are continuing to allocate capital. We closely monitor the returns for our various credit card receivables vintages and are comfortable with their performance as a whole. We also closely examining delinquency, payment, yield and charge-off vintage level for a marketed lower tier credit card accounts. This data supports our desire to continue our allocation of capital to these card card offerings and to grow the receivables underlying these offerings. Simpler vintage and return data underlying our traditional near prime credit card offerings support continued efforts to market and grow these accounts. While we added an average of 750,000 gross new account new credit card accounts in the second and third quarters of 2007, we are now marketing at a level where we expect to add very modest numbers of gross new accounts this year until new liquidity opens back up. While we would like to be marketing at higher levels, we will not risk out pacing our existing funding facilities.

As J. Paul will further discuss our decline in marketing levels affected our various managed receivable statistics and earnings in the fourth quarter and it is expect today have an adverse effect on these statistics and earnings in the first and second quarters of 2008. While our data for credit card receivables are meeting our expectations, the mere volumes and timing of account originations can be expected to have significant consequences on our managed receivables statistics and earnings.

Specifically, fee income levels on existing portfolio and newly marketed accounts are not sufficient enough to offset peek charge-offs on the average of 750,000 accounts we marketed in the second and third quarters for last year. A significant majority of those 750,000 accounts that we averaged in those quarters were comprised of lower tier receivables that will hit peak charge-off vintage levels approximately eight to nine months after origination. While this will have a negative short-term effect on earnings, I would like to point out that we a recurrently forecasting increase in cash positions for the company over most of this year. We hope to utilize this increase in cash to take advantage of portfolio opportunities that might present themselves to us during the year. We have always been very happy with the return expectations for our originated pools of loans, but we have historically had greater returns on purchase portfolios than originated portfolios. So we will still look to pursue these.

We have always looked to purchased credit card portfolios as a bit of a hedge on our originated business and as a growth revenue during times in which other credit card issuers have pulled back their marketing and origination efforts. We have successfully acquired and serviced well over $6 billion in credit card portfolios over the years and it is a huge strength of our company to have the ability to successfully purchase, integrate and service these assets. We also have had success in the past in attracting funding and equity partners to purchase credit card portfolios along with us. Many of you will recall that in the last negative credit cycle, we were able to purchase several portfolios as attractive returns.

Turning now to our other segments, our focus on IRRs as a basis for capital allocation resulted in our fourth quarter 2007 decision to discontinue the operations of several unproven businesses. First, we decided to discontinue the operations of 105 of our retail Micro-Loan store fronts in six states. We have reclassified these operations as assets held for sale on the balance sheet and written them down to fair market value. Moreover, based principally on declining multiples, we have seen them on other publicly traded retail Micro-Loan companies and the impact of this multiple contraction on the fair value of our remaining retail Micro-Loan operations we have taken a $48.4 million good will impairment charge with respect to the remaining operations in our retail Micro-Loan section. Looking forward, we plan to continue our retail Micro-Loan segments operations in the remaining states where we have had a history of success or projecting future success and we expect this segment to return to profitability in 2008. Within this segment, we have focused on underwriting and collections improvements to reduce charge off levels in 2008.

Furthermore, segment management has introduced a campaign to improve operating efficiency as the branch and headquarter levels to reduce expenses and improve the bottom line. Based on their lack of proven IRR potential, we also discontinued several businesses within our other segment during the fourth quarter. Specifically, we discontinued our store value card operations, our U.S. internet based installment loan operations and operations under which we have purchased and serviced loans secured by motorcycles, all terrain vehicle, personal water craft and the like. Also, we have transferred those intangible assets of our merchant credit subsidiary that have on going utility to our credit card segments enabling us to shut down the bulk of its separate operations. We learned a tremendous from these various discontinued operations and the experiences we gained through this operations have yielded and are expected to continue to yield besides for marketing success within our credit card segment.

Nevertheless, based on the current liquidity environment, we felt it prudent to reallocate our capitol from these discontinued operations to more proven and higher yielding endeavors. Based on these various actions the only remaining operation within our other segment is MEM our U.K. based internet Micro-Loan originator. While we believe that the returns associated with these operations are very attractive, we are proceeding with a little more caution here as we test and learn more about this business. We are implementing our various credit risk disciplines into the business and we like what we are seeing as we analyze actual vintage performance from a return of perspective. Our MEM operations are expected to be profitable for us in 2008 even with the relatively low allocation of capitol to these operations. One of the key advantages of this business is that its yields and cash on cash returns are high which served to allow for reasonable growth with relatively modest capital requirements.

Now, let's turn to our debt purchasing and collections subsidiary, Jefferson Capital. The great thing about this particular business in the current environment is it has been able to grow at a good pace with good earnings. While at the same time generating positive cash flows that can be dividended to us for use in other parts of our business. Jefferson Capital posted solid fourth quarter results for $10.3 million in pretax income and its full year 2007 pretax income is up by approximately 40% over 2006. Jefferson Capital is well positioned to continue the growth of its balance transfer in Chapter 13, Bankruptcy Lease Business.

Furthermore, as pricing for defaulted paper has fallen, rather significantly and like , more opportunities are likely to arise. The last of our business lines to discuss is our Auto Finance segment which reported an $18.1 million pretax GAAP loss in the fourth quarter. Car financial, our first acquisition within the auto segment experienced $1.6 million write down related to intangible assets as its preacquisition network of buy here pay here dealers has tried it more rapidly and produce less profits than originally inspected. We also recognized a $10.7 million impairment charge against GAAP earnings on the receivables of our Patelco acquisition which is serviced by our acquired ACC operations. Reflecting some of the same difficulties that other Auto Finance companies have seen, the Patelco portfolio is experiencing greater delinquencies and charge-offs than we originally had expected and forecasted in our GAAP asset valuations at the time of purchase.

Lastly, Just Right Auto Sales, our own buy here pay here dealer shift operation expanded to ten locations as of year end and is in the process of rolling out another three locations. We continue to be pleased with our early sales and asset performance results. Now with standing the losses we have experienced within the Auto Finance segment, we believe our platform can provide a sound basis for attractive returns in the future. Much of the GAAP losses for this segment are attributable to the factors that I mentioned previously.

Although one can expect continued losses in this segment based on its start up nature, its start up operations like these, fixed costs are high relative to the early volumes of business produced and increases in bad debt allowance cause a disproportionate depression of GAAP earnings. Our desire in the current environment to moderate growth within in our allocation of capital to this segment means it will take longer to get the scale necessary to produce the kind of profits we would like to see. This does not us trouble us, however, provided we stay focused on the marginal returns of the next dollar of Auto Loans out the door. We are closely scrutinizing every product offering and reworking or discontinuing those that do not produce very attractive marginal returns.

The silver lining for us based on the current liquidity environment is that there has been a major pull back by Auto Finance market participants. Accordingly, we are are able to race the pricing of our offerings as a way of both controlling the growth rates and required capital deployment to our Auto Finance segment and insuring that the selective assets that we put on the bulks in this environment can produce good risk adjustment returns. If we can prove over the coming months that we can consistently produce strong returns within the Auto Finance segment, then you can expect us to allocate more of our available capital to the segment to facilitate more rapid growth.

Our fourth quarter actor were difficult, evidence or commitment to bulk value preservation in the short run and value creation over a long return of variety. Not only have we taken decisive actions within each of our businesses but we have also taken advantage of the depressed trading prices of our stock and purchased $2 million shares of our stock since our last earnings call. $1million for a private transaction and another $1 million in the open market. Clearly with our stock trading at a price well below bulk value, we will continue to look at stock buy back opportunities when consider where we can produce our highest returns from the deployment of our capital. With that, I will turn it over to J. Paul for his

Thank you, David. To recap our results for the fourth quarter we reported GAAP earnings of $15.8 million or $0.33 per share, compared to $9.7 million or $0.19 per share in the fourth quarter of 2006. Our fourth quarter 2007 GAAP earnings from continuing operations were $25.8 million or $0.54 per share, as compared to $16.7 million or $0.33 per share for the fourth quarter of 2006. For continuing operations, our fourth quarter 2007 managed loss was $18.2 million or $0.38 per share as compared with managed earnings of $26.6 million or $0.53 per share in the fourth quarter of 2006. basis, we reported a net loss of $28.1 million or $0.59 per share, compared to earnings of $19.9 million or $0.40 per share in the fourth quarter of 2006.

Our GAAP earnings included $211.1 million of income we recognized through the sale of our lower tier credit card receivables in an off balance sheet securitization transaction. Our off balance sheet securitization of these receivables had the effect of writing our retained interest in these receivables up to their fair value. We should note however that the fair value of our retained interest in these receivables is so much depressed by the large vintages of lower tier credit card receivables from the second and third quarter of 2007 that will cycle through peak charge-off levels during the first and second quarters of 2008. We expect the fair value of our retained interest to rise fairly significantly at the end of both the first and second quarters of 2008 as these charge-offs are realized, thereby leading behind receivables of greater earnings power and stability.

With our fourth quarter 2007 off balance sheet securitization of our lower tier credit card receivables we now have greater consistency in our accounting treatment of our credit card operations. Substantially, all of our credit card receivables are now valued at fair value through off balance sheet treatment according by FAS 140. We have resolved the issue of our lower tier credit card receivables being under value with on balanced sheet presentation through large bad debt allowances that ignored the significant value of the I/O strip inherit within this particular asset.

Now reflecting the valuation of our retained interest in our lower tier receivable at fair value, our bulk value per share stand at is $16.73 per share at year end, up $0.50 per share from the $16.23 bulk value per share reported in September 30. As far as our liquidity picture, we had over $108 million of unrestricted cash on our balance sheet at year end. If you combine that with the available to draw amounts based on the collateral underlying our securitization and financing facilities, we had over $220 million of available liquidity at our disposal at the end of the year. We expect our liquidity position to be enhanced in the coming weeks given that the first quarter traditionally a heavy payment season for us.

We also note while we are not counting on them, we believe we can see an increase in payments based on the Federal Government Stimulus Package which will sending checks out to a sizable percentage of consumers. If this is similar to tax refund season which we would expect it will be, we would look at even more cash generation during the second quarter of the year than we are currently projecting. David already discussed in a fair degree of detail the business operations we discontinued in the fourth quarter and they are also detailed in the earnings release. As we turn now to review of our managed receivables statistics, you should note that our earnings release presents the statistics for all periods on the basis of our continuing operations only. For your reference, however, our earnings release reconciliation of GAAP and managed earnings also contains GAAP and managed details of our discontinued operations current periods.

In so far as managed statistics goal, our net interest margin was 17.8% in the fourth quarter of 2007 as compared to 18.6% during the third quarter of 2007 and 22.7% from the fourth quarter of last year. Our other income ratio fell to 15.1% for the fourth quarter from 16.9% in the third quarter and 16.1% from the fourth quarter of 2006. Our adjusted charge-off was 13.4% for the fourth quarter of 2007 as compared to 10.1% in the third quarter of 2007 and 10.9% in the fourth quarter of 2006. In our 60-plus day delinquencies as of December 31, 2007 were 18.4% versus 14.6% as of September 30, 2007 and 14.1% as of December 31, 2006. Each of these is statistic is adversely affected by our significant reduction in marketing buying in mid August of 2007.

As dated previously noted, we added a record number of accounts over $1.5 million in is second and third quarters of last year with large vintages of our lower tier credit card offering. As these large vintages of accounts and underlying receivables cycle through delinquency categories and on the peak vintage charge-off levels within eight to nine months after account activation, we can expect to see greater delinquencies and charge-offs of finance fee and principle receivables. Thereby, depressed our net interest margins and our other income ratios and increasing or adjusted charge-off rates in the absence of comparable marketing and receivables origination levels. These effects are expected to be significantly more pronounced in first and second quarters of 2008 with further significant adverse trending degradation in these various ratios until the large vintages of credit card receivables works through there with three of the normal charge-off vintage.

In addition to these vintage base influences on the managed performance ratio, we should note that our second quarter 2007 money in UK portfolio acquisition at the affected depressing that interest margins in the fourth quarter of 2007 relatively to the fourth quarter of 2006. As if net interest margins are lower than those over U.S. portfolios. Additionally, our U.K. portfolio has contributed to growth in our adjusted charge-off rate as an increasing proportion of charge-offs within this portfolio now consists of receivables that we have funded post acquisition as contrasted with receivables that we purchased at a discount. Our managed ratios also performance also have been affected by changes in our credit card collections program throughout 2007 and changes in our credit card billing practices in particular during the fourth quarter of this year to address negative amortization changes requested by the regulators of our issuing bank partners. card receivables program.

During fourth quarter of 2007 for example, we began to reverse fee assessments as part of a systematic program to prevent negative amortization within our credit receivables portfolios. Now with standing these changes to our account management practices, we seek continued potential for attractive IRRs within both our near prime and our lower tier credit card offerings. As David mentioned, we track these IRRs on a vintage basis and stress the calculations for changes in our account management practices, changes in our underwriting criteria, changes in our funding costs, changes in the general economic environment and changes in the purchasing and payment behaviors of our customers. Based on all of these factors we are can currently comfortable with the quality of our asset and with our potential for continued growth in these assets at whatever pace that our liquidity situation will allow.

Because of the GAAP between the guidance we previously given for the fourth quarter and our actual fourth quarter managed results, I would like to spend some time assisting you in identifying some of the main differences. We took a $53.6 million pretax charge impairment charge for retail Micro-Loan segment and we took at $3.6 million pretax impairment charge associated with our classification of 105 retail Micro-Loan store fronts in six states as held for sale. To calculate these charges, we looked at current market conditions, the expected present value of cash flows associated with the businesses and the prices of comparable businesses. As David previously discussed, multiple contractions for the public held peer group in this segment contributed prominently to these impairment charges. We also incurred $6.9 million of pretax losses on third party asset bank securities owned by a subsidiary which were not contemplated in the previously communicated guidance. At the end of the fourth quarter we had approximately $5.5 million of remaining net equity exposure to these investments.

We also wrote our $7.4 million pretax of internally developed software and other assets no longer in use and recorded a pretax $1.6 million charge for dealer in tangibles impairments within our Auto-Finance segment. When you remove these charges, we missed our managed forecast of the fourth quarter by approximately $22 million.

Principle operating components of this short fall were lower receivables growth resulting in less interest in fee income, accounting for about $9 million for the quarter. Lower fee income, but with a lower cash impack from the change in minimum payments as it relates to negative amortization of about $6 million, as well as $3 million in lower earnings from our Auto Finance and Micro-Loans businesses and an increase in our fourth quarter legal accruals. As we look forward to the future, we will be keenly focused as David said on reallocating our capital to those parts of the business they can demonstrate the best proven IRRs at the lowest financial and operating risk.

The actions we took in the fourth quarter and will continue to take into 2008 will continue to look for ways to drive great efficiency and cost reductions within our various businesses. Our various fourth quarter actions have also sured up our balance sheet and positioned us to preserve our bulk value and grow that bulk value to the extent that growth capital is available to us. While there is far too much uncertainty in the economy and within the global for us to give any specific guidance about 2008, we do believe we are well positioned to earn attractive marginal IRRs from the capital that we will deploy for our product offerings and to grow to the extent liquidity is available to facilitate our growth. Let me conclude now by thanking you all on behalf of both David and me for your interest in CompuCredit and your participation in the fourth quarter earnings call. We expect our 10-K to be filled in the next several weeks and I encourage you to review that filing for many more details about our fourth quarter and our expected future trends. With that, we would be happy to open things up for question.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Sameer Gokhale with KBW. Please proceed.

Hi. Just wanted some clarification on the closure of your micro lending stores, the one that you identified. Which states were those closures in and specifically in your view, what was contributing to perhaps the under performance of those particular stores?

It was six different states, and we basically, based on the number of stores, none of the states represented a big portion of that business. It was just various states where we were not showing very much on opportunities for increased profits going forward. Some of them were in a loss position and so we made the decision in the fourth quarter to exit from there at that time.

Can you identify for us specifically which those states where?

Sameer, we are currently in the process of rolling out this data to the affected employee base and for those reasons it would be premature for us to talk about it specifically right now.

Okay. And then you mentioned that your secure tier some lower tier receivables. I was just curious, was the securitization part of an existing facility or did you find new funding for these somehow which given the challenges in the asset back markets, it seem so much surprising so can you just give us more color on what the context around that securitization of your lower tier receivables?

Sameer, as you probably recall, we actually increased the capacity under one of our lines in our last earnings call we announced that in December. Part and partial to that effort, we began looking at the facilities and the trust arrangement and made some changes to the trust in December to take those assets off balance sheet.

Okay. So this is part of something you already arranged for before given the time in the market it is not like you went out and got a new facility by means. That's helpful. Okay. Thank you.

Thank you.

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

Yes, good afternoon. J. Paul, I was wondering the $22 million miss, was that on a pretax basis or after tax basis?

Carl, that's on after tax.

Okay. So, does that imply that you're roughly recurring earnings are around the $0.40 range for the fourth quarter?

Yes, if you pull those out, that's what we -- the $22 million was basically the $0.40 so it would have been $0.40 in addition to the --

$0.40 reduction from the guidance.

Right.

Okay. Second question, in terms of the increase in delinquencies you mentioned that you are not seeing any real degradation by vintage. Is the increase in the delinquencies we are seeing from the pressure from the U.K. and the lower tier mix shift or maybe you could elaborate a little on the increase in this state delinquencies.

I'm going to have Rich House answer that question for you, Carl.

Sure, Carl. Actually, what we are seeing are aggregate portfolio absent the lower tier segment. We are basically seeing flat year-over-year delinquency performance. The U.K. actually has improved quite a bit as far as delinquency goes but the rest of the portfolio has been roughly flat year-over-year and the delinquency increase that you are seeing is simply a vintage effect as I think both David and J. Paul touched on. For those of you guys who have been with us a long time, I remember me on conference calls back in 2001 and 2002 during a similar time period when we had a big marketing effort follow by really reducing our marketing associated with liquidity markets. What that results in is a vintage result as your portfolio level. So, what you are seeing in the delinquencies is strictly associated with the lower tier portfolio being tremendously added to in the second and third quarters and now going through the first half of the year their peak charge-off rate. We expect that the charge-off rate will increase as J. Paul touched on in the first half of the year and then diminished significantly in the second half of the year. That is supported by our observation that our early stage delinquencies and lower tier product are roughly 30% lower today than they were in October. Once again, this is not something that suggests the economy is improving or deteriorating, it is simply the mathematic of we put on a large slug of accounts in the summer and the fall and those account run up to the peak charge-off base in the first half of '08 and therefore going to their peak delinquency face currently.

Do you plan on originating a good mix near prime going forward or is it going to predominantly be the lower tier.

I think that moving forward we will continue to be in both the near prime and the lower tier segments but that is all, it is all predicated on the appropriate liquidity. Right now, what we are doing is we have slowed down our marketing in both segments in order to insure that we have enough liquidity protect as David said earlier the bulk value of our enterprise.

Are you still marketing the level to originate 150 to 200 or did you scale back significantly from that?

We scaled back from that.

Can you give us a range of quarterly marketing dollars to expect.

Well, the difficult part, Carl is that we are and the reason I am going to refrain from giving you that information is that we are as you all know actively pursuing a lot of different alternatives to enable us to open up that marketing. What we do know is that now is a good time to be marketing in the near prime space because we have a lot of our major competitors have pulled back so much, we know now is a good time to be marketing, but first and foremost we are going to make sure we are in a strong cash position to enable us to one to ride out the liquidity crunch but two to have cash and take advantage of portfolios that might come off.

Last question, David, in that terms of cash position as you mentioned, you expect it to improve in the near term because of tax refunds and the similar package.

We also think that the portfolios are cash positive under our current forecasted plan with that reduced marketing over last year. So even without the impact of an economic stimulus plan, we expect our cash position to improve. That, we believe that stimulus plan will be helpful because we have seen it at tax season it has been helpful.

Right.

We saw back in 2002 when there was stimulus plan that was helpful but are not counting on that to increase our cash position. We believe the nature of running our business as we are running it currently will provide us appropriate liquidity to move forward.

Okay. Great. Thanks so much for the color.

Your next question is a follow up from the line of Sameer. Please proceed.

I had a question on the portfolio acquisition opportunities. I mean it seems like, in talk to some of the companies in the space, it has been a little surprising that even performing portfolios really haven't, -- don't seem to have come out on the market just yet. There are couple of big ones that some of the sellers want to go ahead and market but given the increased consolidation in the marketplace compared to say the last economic cycle when you have subprime guys selling portfolios. I mean, is there anything unusual you are seeing in that part of the business, do they not want to carve out and sell parts of the subprime portfolios is consolidated. Industry is it just reduced opportunities in that business? You talk about your thoughts on that part of the business and opportunities there.

My expectation is that there are numerous potential sellers and we have also heard rumblings of several potential portfolios that might be coming to market. And you are right, Sameer, the last time there were specifically some subprime issuers, but there were also other issuers who just made the decision in an economic downturn that a book of business that had maybe not been created as a subprime asset class but had migrated down to a subprime portfolio, that's the kind of things we think we might have an opportunity for this time where somebody put on a prime account that may due to mortgage related issues or otherwise, may have fallen down into subprime categories, and if you are a prime issuer you really don't have the where with all to know how to handle that type of portfolio. We feel like that prime issuers who have pieces of portfolios that have turned into subprime portfolios are probably going to look to devest the next 6,12,18 months. Further more as you point out, there have been a few large portfolios of performing assets and some in subprime, not some in the prime area that have sort of hit the market and have kind of been pulled back. So we actually think there's probably a little less competition today in any type of portfolio purchasing just there's not that many people out there looking to engage in portfolio purchasing activities. I would also add that we are now confident in our ability to purchase portfolios in the U.K..

Yes.

We've had great success with our portfolio we purchased earlier this year and are very comfortable with our servicing platform there. Notably, the U.K. hasn't gone through a rescission in a long, long time. As they begin to struggle on the consumer front and their credit card industry is larger than it ever has been, we believe there's opportunities to buy portfolios in the U.K. and we are one of the few buyers there.

In the Jefferson Capital part of your business, it seems like prices seem to have fallen. I would say maybe by 25 to 30%, maybe more than that on the older classes of paper which is definitely positive but it seems like collections may be weakening in that part of the business. As you look at the pricing on those portfolio, usually the collections on those portfolios, do you still think that's an attractive market to jump in, jump back into with both feet or do you still want to hold off until you really ramp up in that business until later on perhaps in 2008?

We think that it is attractive today if you are buying the right portfolio. Sameer, you make a good point in that. What has happened with some of the collection rates is a collection tool that's often times used to get somebody to get a second mortgage on their home. Obviously, that tool is cramped if not taken away entirely in today's environment. When you take out the recovery based on second home mortgage payments and look just at the average payments coming in from borrowers, you see that we haven't seen really a down tick in performance on the collections on those types of accounts. So, it is one where you have to be careful. So, I went necessarily say we are going to jump in with both feet but having been in the bad debt buying business on and off since 1990, we believe we actually have a pretty good knowledge base as to when is the appropriate time to go back in and like I think, we would be fairly be jumping in with both feet but we just think its going to be an attractive area.

Okay. That's great. Thank you.

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

You said that you have a certain amount of liquidity for purchasing a portfolio, could you expand on that and I think you referred to ability to raise outside, can you expand on that as well?

I think that probably in September, October of last year, liquidity even to purchase portfolios was probably as tight as we have ever seen it. So to fund even a good transaction was very tight and would be difficult to get. We've had several discussions with some of our previous lenders who are somewhat enthused to get back into that market now. So we feel pretty good about being in the market to go after those. When we talked about equity and the lending piece, part of what we are trying to add some to our cash position is such that we won't have to use much of equity partners because obviously that's where most of the return is on these things and we can can get attractive rates on pretty much the senior lending piece. But if we have a very large portfolio in which case we might need some additional equity, we feel really comfortable about getting folks to come in on along side of us on that type of thing too.

To adjust a little color on that Moshe, I think what you are finding in this particular liquidity market at least the flavor we are getting is that we have a track record. I think we have purchased ten distressed portfolios. I think we talked about earlier over $6 billion in phase value. We have done more of that than anybody else in the U.S. or anywhere else. So I believe what you find is that liquidity providers can get comfort with our expertise A and B you have an amortizing pool. In this particular liquidity environment, obviously people are looking at where they can distribute the debt over time and as you have an amortorizing pool you at least have an amortorizing view of it such as not growing. We are seeing a more appetite if you will for someone to partner with us on a portfolio purchase than you would think is the case just given the general liquidity environment.

Your next question comes from the line of David Hochstim with Bear Stearns. Please proceed.

Hi. Can you talk about what's happening with the bank regulators and your bank partners? You eluded to some changes in the fourth quarter. I am wondering what's happening there in terms of regulatory reviews or other potential restrictions.

The changes in the fourth quarter were similar to changes that most credit card operators around the country have made as it pertains to negative amortization issues with fees and almost all credit card companies have instituted similar policies. That didn't really have a lot. It had to do with the regulatory agencies but not necessarily in particular with us. We continue to have discussions and think that we are are making some progress with the regulatory agencies toward a resolution that will solve any of their concerns and allow us to continue to run our business as we have in the past.

And can you just remind us what the changes you made in terms of accruing fees after 90 days earlier in the year? That would also intended to reduce neg am, wasn't it?

Yes.

What was different in the fourth quarter.

The fourth quarter there's an issue of if somebody makes a payment and the payment does not add up to their fees and interest, then you either have to put that person into a delinquency status or you have to waive some of those fees. We think it is important to keep those people as paying customers so we keep them in the current status and we look to waive that relatively small level of fees that they may not have hit with the minimum payment.

Can you give us sort of an order of magnitude in terms of what kind of available line there is on those cards and how much they would have occurred that kind of pushed them over the edge, hoping to buy they would have after you reversed that if any.

Well, a lot of the lower tier customers have limited open to buy. Typically, what happens is somebody opens the card, they use up a lot of their open to buy pretty quickly in the first 6 to 8 months, and then what happens is as that customer performs and pays over time we graduate the customer to more and more credit line. Now, we cap those out after a while because we think that someone who is confident at $400 or $500 credit line can still be a great customer up to a $1,000 or $1,200 but we never, I shouldn't say never, we rarely take that customer up to $1,500, $2,000, $3,000 as we have seen because we have seen other issuers in this space have problems with that in the past. So we monitor that closely and we try to take customers who are good customers with us and continuously graduate them up. So it is hard to give you an exact this is what the profile of the person, the open to buy and the like is. That's sort of the overall approach we take with the lower tier customer.

Can you give us a sense of how much the number of accounts might decline over the next couple of quarters as you reduce marketing and still have some.

We don't have that drawn out here. We are actually looking more at the receivables base which we think will moderate some but we don't think it is going to drop in the significant amount.

So, I guess, should it drop and balances should drop in first quarter and then maybe start growing a little bit? Is that?

I would say that it is likely they will drop a little bit in the first half of the year and grow in the second half of the year. So, I would expect that we will see sort of year end receivables probably a little above where we ended the year.

Okay m thanks.

Your next question comes from the line of Rich Shane with Jefferies and Company. Please proceed.

Thank, guys. A couple of questions. Last quarter when you were asked the question about net portfolio growth in terms of number of accounts, you expected modest portfolio growth, I think those were exactly your words. Modest account growth. Instead you saw about 3% or 4% declining an account and that accounted for a by your estimations $22 million after tax variance. Does that really make sense? Is that the way we should be looking at this? That slight of tweak in terms of the account growth number would have that big impact?

It is not just the account growth number. It is also the purchase rate. One of the things that, and we that you really with all of the big retailers as well as a lot of prime credit card issuers. What we saw in the fourth quarter was not negative performance by our customer base in terms of delinquency issues but did see them take what is arguedly the rational action of lowering their spend. So we did see the overall consumers at least of our several million customers slow down their purchase activity some in the fourth quarter. So it is not just the number of accounts which was lower than we what have forecast. It is also a lower level of purchase activity on our customer base.

And when within the quarter did you actually sort of start to identify that trend?

Well, really in the fourth quarter especially, you really don't know that until after you go through the Thanksgiving and the first couple of weeks of December. As most people know, the line share or big percentage of overall purchases for the year are in that kind of 30 to 40 day period of time. So we had not seen through the end of October, we had not seen performance that gave us a concern that it was going to be weaker in the fourth quarter but then once we started seeing the purchase activity come in from Thanksgiving and Christmas and can like coming in a fair amount lower than what we would have originally thought. As David said, that's consistent with our other credit card here.

And when did you guys make the decision to close the businesses? You know, to close the 106 micro lending branches?

That would have been during the fourth quarter, during December.

I guess the question that is, given that by January 1, you knew all of this and you had outstanding guidance, why not tell people that this was coming? I mean we are sitting here looking at these numbers and pretty surprised by them. All of that, you guys will to be aware of by Jan 1. Why not tell people these are things coming through the numbers?

Well, our approach throughout our history has been one of we are going to run the business for what we believe to be in the best long-term interest of the shareholders, we are going have quarterly calls and discussions and report the results of all of the activity that we took. So, we have not historically taken an approach of trying to, you know, mid quarter announce a lot of things. What we try to do is spend our time and effort running the business, making the right decisions and to have a chance to discuss those on a quarterly basis.

Right. And again, look on one hand I think there's a lot that went on here that was good, closing down businesses that aren't hitting hurdle rates and being willing to take charge-offs to do that, I think is a good way to create long-term value. I don't disagree with that. I think that there are many companies who aren't willing to take that decisive action but at the same time, it is clearly material. I think that's the word you used to describe what was going on. It just seems surprising that given the materiality of that you wouldn't communicate that to shareholders and some sort of pre-announcement given that again, there are business things that vary from within the quarter within normal variances that I think people expect but when you are shutting down, you know, 106 branches when there's a $22 million after tax variance on your core business that strikes me as the kind of stuff you should tell people.

Our conclusion with respect to the discontinued store front operations, if you really look at the details in the numbers you will see when we file the 10-K, that particular decision and the charges related to that decision were indeed a material. The more material charges were the charges associated with good will impairment on on going operations. So that is kind of how we had looked at that issue. They weren't really charge-off themselves associated with our desire to defray a lot of the R&D efforts within our other segment. There were clearly assets that is we looked at that we looked at so continue to use these assets in the credit card segment are some of these assets that we feel we have no longer any utility for. But in terms of the actual discontinued operations and the direct charges, we didn't find those and believe those to be material.

Got it. I appreciate you guys taking the question in the spirit in which they're asked. Last thing, last quarter you basically say that given the current liquidity position that you felt that you could continue to modestly grow the portfolio. Again, I think the number was 150 plus gross new accounts and modest net account growth. The liquidity position has not changed. You basically said even if things stayed status well last quarter you would target that. I am not sure why I understand the difference now given you had no assumptions back then from my understanding that liquidity would improve.

Well, I think that our impression was that we were going to by now have seen a light at the end of the tunnel which we have not yet seen in the liquidity environment. So we didn't necessarily think that by with February 13t that liquidity markets were going to be back open but my expectation when we last talked in November was that there was a reasonable chance that after the beginning of the year that we would have seen some improvement in the securitization markets and we would have seen some of the traditional secure tiesers back out in the market in a more robust nature than what we have seen. And we monitor that pretty closely, we go to various meetings, we talked a lot of investors and we are not seeing anything right now that would indicate that the light at the end of the tunnel for the securitization market is goes to be turned on anytime quickly. So that is why you are hearing a little bit of a different sentiment from us today than you heard when we talked in November because we had kind of been really since mid-August in a very, very tight liquidity situation. That was basically three months and our expectation would have been that the entire tightness probably would have been six months and here we are six or seven months after the fact and we are not seeing a lot of positive signs in the traditional securitization market. One of the areas that we focused, have been focusing on is looking at the liquidity that comes outside of the traditional securitization market. We think that there is liquidity in the system. There's not a lot of liquidity in the traditional ABS world that we have operated in the past though.

Additionally, the very phenomenon, David speaks up which is restricting us from growing at the rate we want to grow at is also restricting everyone else. And our view of available portfolios to buy is more favorable than it was back when David last spoke to you in November. So we are rationally looking at how to deploy our capital. As David mentioned before we have a long-term view. We believe the market is there. We know that we have liquidity we can grow at a rapid and profitable pace but if it takes sense to us at this point in time to grow at a more measured base preserve our liquidity and put ourselves in a situation potentially to take advantage of other people in a liquidity crisis as well.

That makes sense, guys. Thank you for taking all my questions.

Sure.

Your next question comes from the line of John Hecht JPMC Securities. Please proceed.

It is JMP. She almost had it. Just going line by line your managed earnings and related to your charges, should we put down the good will write offs, the software write offs and dealership intangible write offs in the operating expense line and then the other $6.9 million CDO write downs and the $3.6 million in the net charge off line in order to normalize those or is there another way to allocate that?

You are looking at the statistics, now, you are talking about the charges related to continuing operation .

Yes.

It is, I think the challenge, John is that, some of the impairment related charges related to continuing operations and some of the impairment charges related to discontinued operations. In so far as the bucket of expense were lot related charges. As to the charge-off item that you mentioned clearly, yes, those would go into the charge-off bucket.

okay. So the charge-off bucket --

We have been talking about.

Yes, so the $6.9 and $3.6 would take out of the 139.

That's it. Its $6.9 million is that's the other income line item.

The other, there's a large portion in the operating expenses that some amount devoted to the below the operating line or that on going operating line?

Right. That's correct.

Okay. And then, J. Paul you gave us some good ideas for the expected trends on a ratio perspective. Trying to just looking I guess at the three primary ratios, trying to get a sense for what we should be expecting on a modeling perspective. On the adjusting charge off rate on one level we have positive seasonal trends with respective credit on the other you have the peak charge-off cycle. But given that you added the most, I think the most net new accounts on organic basis in the third quarter, should we expect the first quarter to show an increase over the fourth quarter and then the second quarter to show an increase over the first quarter before starting to come down or would it be the reverse of that?

I think what we are looking at is a relatively consistent level of adjusted charge offs in the first and second quarters of next year. They will be higher than they are this quarter. This also gets to Carl's question he asked before, on the, you know, the delinquencies, notably giving effect to Rich and all comments about the vintage effect. We are sitting at the absolute, you know, of delinquency rates that we see in our 60 plus day delinquency categories and that's coming down anything significantly through 2008 as this vintages actually starts to charge-offs. As I said, at a roughly constant rate in the first and second quarter of next year.

Okay. And we understood that the product mix shift, can you tell us just to give me a sense of how, I guess to quantify the potential jump, what are peak charge-offs in the low FICO credit card accounts. Can you give us a rate to expect in just about so that we can get a sense for the magnitude of expected jump.

When we published our 10-K in a couple of weeks here, we are going provide the usual table we provide that shows what our gross charge-offs for the entire business, and I think using historical data, looking at some of our acquired portfolios and originate portfolios, you shall be able to come up with some estimation of what the charge-off rate should be.

You can't give us anything right now in terms of the negative variances in those two different products.

I can't.

Okay. So in the net interest margin, we could expect decline as well for the first couple of quarters and then is that expected to increase or just stabilize at a steady state? I guess the same question with the other income ratio.

They would both look to increase in the latter half.

Okay.

The latter half of the year, yes. As you point out, John, your finance charges and late fee charge, also net and interest margin, your fee charge offers are against your other income ratio and we see those ratios being roughly comparable in the first and second quarter of next year just like the principle charge off ratio.

Okay.

Significantly lower than the fourth quarter of this year.

Okay. And is there a steady state other income ratio that we should given that you, I guess your mix shift would stabilize theoretically in the second part of the year, just given the low net portfolio of expectations, is there a period of time where we can look back to say this is, this is a sort of stabilize other income ratio?

You know, with the various portfolios that we have purchased over the years, its used the overall ratios from quarter to quarter so it is kind of hard to tell you, go back and look at this is a steady statement. If we are sitting where we are today six months from now and the liquidity markets are still exceptionally tied and we are continuing to run along at a very low growth rate we will be able to give you some guidance at that point as to what to look forward to at a steady state basis. It is just very difficult right now without knowing which direction we are going to go, we don't want to have you anticipating one thing and having liquidity markets open up, portfolios what not that made those types of things difficult. That's why we are refrain to guiding to specific numbers in this call.

But directionally, as you probably know from previous calls the lower tier product has very high income early in its life. So as David was suggesting to the extent that we find additional securitization liquidity or additional liquidity outside the securitization markets and begin to grow in the second half of the year at a more robust base then your fee income will increase at a fairly substantial level to the extent we are moving along in a conservative space it will be lower. That is why it is difficult as David says to point back to a number. At this point, it is something we have to address as we understand what liquidity market is.

Okay. Thanks very much.

At this time, ladies and gentlemen, there are no further questions. With that said, thank you for your participation in today's conference. This concludes this presentation. You may now disconnect. Have a great day.