Atlanticus Holdings Corp (ATLC) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2008 CompuCredit earnings conference call. My name is Lynn and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session toward the end of this conference. (OPERATOR INSTRUCTIONS). 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 thanks for joining us for CompuCredit Corporation's second quarter 2008 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 developments, such as the performance of our credit card receivables, including receivables' levels; net interest margin; other income ratio and charge-offs; acquisitions of portfolios from third parties; growth and downsizing expectations of our Business segment; expected timing and levels of expense reductions; our prospects generally; our marketing plan; plans for our micro-loans' business; our liquidity levels and capital raising plans; 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, 2008.

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website to obtain a hard copy of the press release, our financial statements to view our risk factors, or to look into an archived version of this call.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 everyone for joining us. I'll take a few minutes to discuss our current outlook, review our results for the quarter and update everyone on recent developments with our Company.

Jay Paul Whitehead, our Chief Financial Officer, is here to discuss our financial results in greater detail, and after that we will we'll take questions. Rich House is also with us today to field any questions you may have of him.

As with many others in the Specialty Finance sector, we continue to navigate in an environment with its share of challenges. We have seen dislocation in the securitization markets for over a year now, and this continuing dislocation has caused us to focus intensely on getting our managed receivables' portfolios to a net cash flow generating position. In this environment, we believe that the best approach for us is a conservative one, one in which we manage the business as if traditional securitization markets do not return to their former levels.

To that end we have cut numerous costs and expenses, most notably our marketing costs which have been at a reduced level since late August of last year. During the coming weeks and months, we will further reduce costs and overhead given the lack of improvements in the securitization markets. Our current plans call for even a further drop from our very modest marketing levels. As such, we expect further reductions in our receivables' levels and a diminishment of activity levels in general, which allows us to cut many other areas of cost and overhead.

While we always desire to remain in a position to quickly turn back on a growth engine for new accounts and receivables if the capital markets improved; and while we were holding back on some of our cost-cutting measures until now given this bias, our view now is that we don't see the prospects of significantly improved capital markets for the foreseeable future and we have to react by taking steps to help us deleverage our business. We continue to have cash available if portfolio acquisition or other opportunities arise, and we ended the quarter with over $210 million in immediately-available liquidity; liquidity that is represented by our unrestricted cash balances, plus our immediate draw capacity from our collateral base underlying our existing financing and securitization facilities.

As we mentioned on last quarter's call, it's not a lack of capital on hand that constricts our ability to grow, but a lack of certainty that we will be able to have financing in the future at today's levels as our varied financing and securitization facilities mature and are extended or replaced or not.

We also believe it is prudent to anticipate the affects on our liquidity position of a more marked, negative shift in the economic landscape that would more significantly affect the ability of our customers to make their payments to us. As a whole, our June 30, 2008 delinquencies have fallen significantly given the passage of the record level of second and third quarter of 2007 lower-tier credit card originations through their peak charge-off vintages in the first half of this year.

We also note there our other credit card portfolio delinquencies are generally in line with where they were last year at this time, with some showing modest improvements in delinquencies and others showing some modest weaknesses in delinquencies. Nonetheless, unemployment rates have risen over the past four months and may trend higher, and we have seen somewhat lower payment rates and somewhat higher late-stage delinquency roll rates within our portfolios; the effects of which could include yield compression, higher charge-offs, reductions in receivables' levels, and consequently adverse effects on the cash flows we receive from our portfolios.

Notwithstanding our focus on getting our portfolios to a net cash-generating position, we are forecasting reductions in our available liquidity and cash balances for the remainder of this year, as it will take a few months to realize the full effect of account management actions we have taken in our credit card business and our new cost-cutting measures, and as we continue to make modest net capital investments in some of our business lines.

During the second quarter, we deployed $20.5 million to repurchase $50 million in face amount of our convertible bonds at pricing that we considered particularly attractive. We may use some excess capital to make similar purchases in the future, as we like both the yield inherent within these purchases and the efficiency of these purchases as a vehicle for deleveraging our business.

As noted earlier in my comments and as we have said over the past three quarters would happen, the peak charge-off vintage effects of our second and third quarter of 2007 lower-tier credit card originations had a profound adverse effect on our credit card segments and our overall earnings' results this past quarter. We incurred a GAAP net loss of $44.9 million, or $0.96 per share in this past quarter, as compared to the $11 million or $0.23 per share GAAP net loss we incurred in last year's second quarter.

As we expected, the effects of GAAP fair-value accounting for our securitizations caused significantly lower GAAP losses than managed losses in this year's second quarter. On a managed basis, we recorded a net loss of $101 million or $2.16 per share, as compared to earnings of $12.3 million, or $0.25 per share from last year's second quarter. With the vintage effect of our record mid-2007 lower-tier credit card originations now substantially behind us, we expect charge-off rates to be significantly lower during the second half of the year.

Our confidence in the lower growth charge offs and charge-off rates to come is best illustrated by our delinquent account volumes, which were at a two-year low at the end of the second quarter. Sixty-plus-day delinquent receivables were 12.6% of our portfolio at June 30, 2008, down from 16.5% at the end of this year's first quarter and down from their peak of 18.4% at the end of 2007.

We also expect higher net interest margins and other income ratios during the second half of the year, now that our mid-2007 lower-tier originations have passed through their peak delinquency and charge-off phase. Higher charge-off levels that came with the passage of these accounts through peak charge-off status served to depress these ratios in the first half of this year, as did the effect of our not billing interest or fees on many of these accounts that were more than 90 days delinquent in the months leading up to their charge-off.

Our approach has been fairly straightforward over the last several months. Our number one priority has been to protect the value within the Company moving forward rather than a focus on current growth or profitability. We try and look out 18 to 24 months on cash uses and needs and we believe that we're currently in pretty good shape on protecting value within the Company, while also having some cash available for strategic opportunities that might present themselves.

We believe we have a business that can purchase portfolios in our very attractive rates of return. We also believe we have a business that can earn attractive rates of return on originated credit card assets, when and only when there is some available funding for those assets. We targeted the end of the second quarter to make decisions that will have an impact on our business moving forward. As that date has now passed, we have already put in place several initiatives that will improve cash flow, while preserving our ability to start back marketing at greater volumes once the funding markets improve.

As I mentioned earlier, the first thing we did a year or so ago in response to the credit crisis was reduce our marketing dollars fairly dramatically, and now we are reducing them even further. We have substantially shut down our new business initiatives, as we don't want to be investing in these activities during times when capital is precious. We have reduced overhead staff in other areas as well to ensure that we are operating at a level commensurate with our current forecasted size, rather than a platform design for a much larger receivable base. We have subleased some office space and are looking at other ways to eliminate or reduce overhead costs.

While these decisions caused some pain, they are decisions that were reasonably easy to make inasmuch as they are consistent with the key objectives that I mentioned a moment ago. We think these actions are the most prudent thing to do in today's challenging environment. Let me point out that we do not believe that some of the things that we are currently doing will maximize the value of our portfolio. In fact, we know that with revolving credit the way to maximize the value of a portfolio sometimes means increasing available credit to those borrowers who are performing well. Instead, we are now taking actions to reduce exposure while trying to maximize cash flow such that we don't increase liabilities that may be difficult to fund in the future. So, we are trying to maximize the value of our business within the current environment, rather than hoping for good things to happen in the future.

We do believe that our business model is one that will attract funding alternatives in the future. We believe funding sources can feed the relative strength of our book of business, but are hesitant to step in until they believe the economy is close to the bottom of the cycle. Our portfolios typically perform better on a relative basis during economic downturns than those of prime portfolios, so we think the funding will return to our sector quicker than to some other sectors. We also have pricing flexibility that most prime issuers do not have.

I'd like to briefly address the regulatory issues that we are currently facing. As you know, we have been working with the FTC and the FDIC for a couple of years on some issues that they had raised regarding some of our prior marketing programs. We expected to have favorably resolved the FDIC and FTC matters within a few short weeks after our last earnings conference call in May.

We entered into an agreement in principle with the FDIC and the FTC to resolve their investigations. The agreement contemplated formal settlement agreements with both the FDIC and FTC and was conditioned on the FDIC entering into settlement agreements with three of our FDIC-regulated issuing banks. Under the agreement in principle and under the contemplated settlement agreement, we would have issued approximately $80 million in credits; the cash cost and pretax earnings effect of which would have approximated $7.5 million, an amount we had accrued as a reserve on our March 31 balance sheet.

Even though we reach agreement with both the FDIC and FTC on the terms of our settlement agreements, two of our three FDIC-regulated issuing bank partners were unable to reach agreement with the FDIC, which had the effect of unaligning our agreement with both regulators.

The two regulators announced that they were moving forward with enforcement actions against our Company, as well as some of our banking partners. As we said in our press release at the time, we believe that their allegations are unsupportable. It is incredulous that they can institute litigation against us, when on numerous occasions during the period in question the FDIC personnel in charge of Oversight for Consumer Protection reviewed the materials and found that they complied with all applicable laws and regulations.

That said, we were prepared to resolve the dispute in order to get a costly legal situation behind us, but the agencies weren't able to reach agreements with our two bank partners leaving us little option but to contest their claims. These claims are unfounded and without merit and we will vigorously contest them.

These legal issues have damaged us from a profitability perspective. Some of our account management actions to improve yield have taken much longer to implement. In a slow economic environment, we have to manage revolving credit very closely to ensure that we are able to get the returns necessary in our business. We have worked through some of these issues, but still have some challenges ahead.

In addition, based merely on allegations made by the FTC, Encore Capital with whom Jefferson Capital has a long-term, close arrangement, reached its agreement in early July and refused to honor its obligation to purchase our credit card charge-offs from Jefferson Capital; as well as its obligations to provide flows to Jefferson Capital under Jefferson Capital's balance transfer and Chapter 13 bankruptcy programs.

Although we are in the process of arbitrating these matters with Encore, these disputes contributed to Jefferson Capital's earnings decline in the second quarter of this year and are likely to cause Jefferson Capital to experience significantly lower earnings until this matter is resolved in our favor.

There are three primary reasons why Encore's actions so significantly affect Jefferson Capital's results. First, the fixed price that Encore is obligated to pay Jefferson Capital for our credit card charge-offs was negotiated in 2005 and was based on the going rate for such charge-offs in 2005. Through either collecting our credit card charge-offs itself, or selling our credit card charge-offs to other potential purchasers, Jefferson Capital will not be able to obtain the same level of returns that Encore is obligated to provide to Jefferson Capital at 2005 pricing levels.

Second, because Jefferson Capital uses a cost recovery method of accounting, it must fully recover its aggregate purchase price for each static pool of its monthly purchases of our credit card charge-offs and must expense all internal and third-party collections' costs before it can realize any revenues associated with these transactions. This upfront expensing of costs and delay in revenue recognition can be contrasted with the Encore arrangement under which Jefferson Capital purchased our charge-offs and sold them almost simultaneously to Encore at a significant profit without incurring any significant collection costs.

Lastly, Encore's failure to provide Jefferson Capital with Chapter 13 bankruptcy and balance transfer program flows will slow Jefferson Capital's growth and profitability in these areas as well.

Our Jefferson Capital business is at least temporarily investing more cash than in the recent past to purchase portfolios of charge-off paper. Without Encore sales proceeds as an offset to Jefferson Capital's necessary cash requirement to purchase our credit card charge-offs, Jefferson Capital has been converted from a net provider of capital to a net user of capital. Assuming that Jefferson Capital holds and collects the portfolios of charge-off paper that Encore is obligated to purchase from it, which is probably the most likely scenario, we project that Jefferson Capital will need capital to meet its purchasing obligations through the end of this year. Our forecasts show that Jefferson Capital will resume providing cash flows to us in January 2009, as collections on its newly-held charge-off paper portfolios start to exceed the cash required to meet its monthly obligations in buying our credit card charge-offs.

Moving on to our retail micro-loan segment, our storefronts generated $2.8 million in pretax GAAP earnings from continuing operations in the second quarter. At the end of April we executed the sale of our 81 Texas locations. We also have another 103 locations in six states that are held for sale and classified as discontinued operations. Through a series of states closing with a single buyer, the first of which was completed on Thursday of last week, we expect to fully complete the sale of operations in Florida, Louisiana and Arizona in the third quarter of 2008 and we hope to be able to sell the remaining three states' operations in Oklahoma, Colorado and Michigan by the end of this year. Upon our completion of sales or store closures as planned, we will have 325 retail storefronts in eight states and the U.K.

As we have discussed in the past, our plan when entering the retail micro-loan business was to use our expertise in a multiple-product set to reduce the cost of credit to the traditional micro-loan customer and build this business as a consumer-friendly provider of various products and services. Unfortunately, many in the public policy arena shifted from desiring more financial options for consumers to actually opposing additional financial products and services. Thus, our focus is now on doing business only in states where the monoline product still makes sense for us.

Ohio, where we currently have 91 locations, has been and we hope will continue to be one these states. However, in response to unfavorable retail micro-loan legislation enacted in the second quarter of this year we, along with others in the industry, currently are seeking regulatory approval to market and service alternative products in Ohio. Should we obtain the necessary approvals as the first industry player to seek such approvals has done, we believe these alternative products will meet our customers' needs, state requirements and our profitability thresholds.

While a comparison with our current quarter with our retail micro-loan segment's $6.7 million pretax second quarter 2007 earnings from continued operations shows a significant decline of income, much of this drop is based on our cessation in 2007 of a unique category of profitable loans arranged by three different U.S. credit service organizations.

The reduction also reflects our belief, which is shared by other retail micro-loan providers, that tax stimulus payments received by consumers in the second quarter of this year have temporarily diminished consumer demand for retail micro-loans.

Lastly, our conservative second quarter 2008 approach to loan generation in Ohio, while we await approval of regulatory filings, also contributed to reduced second quarter earnings relative to the 2007 results.

In our Auto Finance segment, we posted a pretax GAAP loss of $762,000 in the second quarter, a loss that is much lower than both the first quarter of this year and the same quarter of last year. Our efforts within this segment are focused on achieving the scale necessary to attain profitability. We are pleased with the progress we are making in this area and we continue to allocate capital to this segment, particularly given the pricing power we now have with the pullback of many other lenders out of the market.

However, continued liquidity market challenges will serve to lengthen the time necessary for us to achieve our desired scale and has caused us to focus successfully in recent quarters on cost reductions to better align costs with the size of our receivables.

We also continue to be very pleased with our MEM U.K. Internet operations that now comprise our other segment. While small and only $72,000 pretax, MEM posted its first profitable quarter this past quarter. Since our acquisition of this business last year, it has experienced very strong marginal internal rates of return and we continue slowly expand these operations.

Fortunately, given the profile of this business, the small loans and quick customer repayments it is possible to expand this business at modest growth rates without huge amounts of capital. This is an obvious attraction of this business in the current liquidity environment.

In closing, I note that like any other investor in our Company, and as the majority of shareholders, we on the management team at CompuCredit are not at all comfortable with our recent stock performance. However, our focus remains on preservation of what we have built and long-term value creation, which we hope will result in attractive prices for our stock over the long run.

We have seen many cycles since founding the Company in the mid-1990s, and we will continue to manage through this challenging cycle with a view toward increasing the long-term strength and value of the Company.

Thanks again for joining us this afternoon and for your interest in CompuCredit. I will now turn the call over to Jay Paul for further details on our financial performance.

Thank you, David. Let me begin by reviewing our performance for continuing operations for the quarter. We reported a GAAP loss from continuing operations of $42.8 million, or $0.91 per share for the second quarter of 2008, compared to last year's second quarter loss of $6.6 million, or $0.14 per share. We also reported a managed loss from continuing operations of $98.9 million, or $2.11 per share compared to managed net income of $15.8 million, or $0.32 per share in the second quarter of last year.

As David mentioned, the record number of lower-tier credit card accounts added in mid-2007 hit their peak charge-off vintages in the first and second quarters of this year and this pressured both GAAP and managed earnings significantly given the drop in our marketing levels in August of last year. Because these large vintages of accounts have passed through their peak charge-off vintages as of the close of the second quarter, we expect significant reductions in our charge-off rates for the remainder of this year.

Our adjusted net charge-off rate was 19.2% in the second quarter, which was up dramatically from last year's second quarter performance of 9%. As compared to our adjusted net charge-off rate in the second quarter of this year, we expect a several hundred basis point drop in our adjusted net charge-off rate for the balance of this year.

David also previously mentioned our 60-plus-day delinquency rate, which has fallen 580 basis points from its peak at December 31, 2007 to its current 12.6% level at June 30, 2008, a low we haven't seen since 2006. With the passage of the record level of mid-2007 lower-tier credit card originations through their peak charge-off vintages in the first half of this year, and in the current environment in which future quarters credit account additions will be a test marketing levels only, we expect contractions in all of our managed credit card receivables' portfolios and more consistency and national seasoning in our delinquencies and charge-offs.

The peak vintage effects of our record mid-2007 lower tier credit card originations are not only apparent in our second quarter adjusted net charge-off ratio, but also in our net interest margin and our other income ratio given that finance charge and fee charge-offs are netted against these respective ratios. Additionally, the fact that we do not bill finance charges and fees on account they are over 90 days delinquent, also pressured our net interest margin and other income ratio statistics in a quarter where we had many accounts in late stages of delinquency prior to their ultimate charge-off.

Accordingly, we expect significant improvements in both our net interest margin and our other income ratio in the latter half of this year given the comparably lower levels of accounts in late stage delinquency and lower levels of charge-offs expected in this period.

Our net interest margin was 12.9% for the second quarter, compared to 13.6% in the first quarter and 18.9% in the second quarter of last year. Similarly, our other income ratio for the second quarter was 6.1%, down from last year's second quarter of 11.8%, and higher than the first quarter's 4.8%, but only due to a $28.4 million pretax gain we recognized on the repurchase of $50 million of our convertible bonds in the second quarter. Without the affects of this gain, our other income ratio would have been 3% in the second quarter.

Currently, our projections for significant improvements in our net interest margin and other income ratio would put these ratios significantly higher than they were during the first two quarters of this year, but lower than the average in 2007. Our forecast here reflects the effects of the account management changes that David mentioned.

The first of these changes in terms was mailed out to cardholders in July and additional rounds of mailings are planned over the next six months or so. As with our charge-off forecast, our net interest margin and other income ratio forecasts also contemplate the somewhat lower payment rates and late stage delinquency bucket of low-rate degradation that has occurred within our portfolios given the stress that many of our customers are experiencing in the current economic environment. Nonetheless, there is always the downside potential that the economy could falter beyond what we contemplate in our models.

To recap our second quarter convertible Senior Notes repurchased, we repurchased $13.2 million in face amount of our $250 million aggregate principal amount of 3.625% convertible Senior Notes due in 2025; and we purchased $36.7 million in face amount of $300 million aggregate principal amount of 5.875% convertible Senior Notes due 2035.

The purchase price for these Notes totaled $20.5 million, exclusive of accrued interest and resulted in an aggregate pretax gain of $28.4 million. Our $50 million of repurchased convertible Senior Notes are held in treasury and have been netted against the aggregate $550 million face amount of originally-issued convertible Senior Notes on our balance sheet. As David also mentioned, based on the yield printed on these Notes at their currently discounted prices and the potential that they provide for us delever our balance sheet at a very low cost, we may make similar purchases in the future.

Turning to expenses, our second quarter operating ratio was 13.9% and included a $5.5 million impairment charge on a sublease of about half of the office space at our Atlanta Corporate Headquarters. Two subleases into which we entered in the second quarter are long-term subleases that expire co-terminus with the expiration of our underlying lease in 2022. But unfortunately, they're at slightly lower rental rates than we pay given the softness in the Atlanta commercial real estate market that has arisen over the past year.

We entered into these subleases as part of our cost-cutting efforts that David also mentioned. Some of these cost-cutting measures have been and are being implementing in the third quarter and beyond based on our view that the liquidity markets are not going to be returning anytime soon to the levels necessary to support growth in our receivables and in our business. In an environment in which we are not really building anything new and marketing only at test levels and, therefore, experiencing net liquidations in our managed receivables' levels, there are a lot of infrastructure and overhead-related costs that can and must be eliminated for us to realize the maximum returns and value inherent within our managed receivables' portfolios.

Until there is a significant change in the liquidity markets, we expect to continue to aggressively pursue operating efficiency improvements across all categories to ensure that we keep our expenses aligned with the level of our receivables to help preserve the book value that we've built within the Company.

The only wild card we see around our ability to significantly reduce our expenses in our operating ratio in the near future are the increased litigation costs we currently are incurring related to the FDIC and FTC dispute and the other attendant litigation that would not have arisen for us but for that dispute.

Before turning to our second quarter GAAP results, let me talk a little bit about cash and liquidity in our financing activities. David already referred to our over $210 million in immediately-available liquidity as of the end of the second quarter; liquidity that is represented by our $133.4 million of unrestricted cash, plus our immediate draw capacity from the collateral base underlying our existing financing and securitization facilities.

David also referenced expected reductions in liquidity through the end of this year as we continue to deploy capital to some of our businesses and before we fully realize the effects of portfolio actions and cost-cutting measures aimed at generating monthly cash balance build and deleveraging our business.

He also mentioned the downside potential to our liquidity position that could arise from degradation in the performance of our receivables beyond the level currently projected in our earnings and liquidity forecasts, and the downside potential to our liquidity position if our financing and securitization facilities are not renewed at or near current advance rates.

It is this last point that I would want to address a little bit further. First, let me note that like us, many of the traditional financers and investors in asset-backed financing and securitization facilities are in a deleveraging and risk-mitigation mode given their own uncertainties amidst the global liquidity crisis. This is where there is some silver lining in the fact that we're not adding credit card accounts at a level anywhere near what is necessary to prevent sizable monthly contractions in our managed receivables' levels.

At the same time that lenders and investors are retrenching and limiting their exposure, our need for funding capacity is dramatically shrinking. Case in point is our upper-tier originated portfolio master trust within our credit card segment, wherein we have a $360 million conduit facility that comes up for renewal in September of this year. With the contraction of our upper-tier originated portfolio receivables that we currently are experiencing and are projecting for the foreseeable future, this capacity is not currently needed. Unless the pricing and other terms for our renewal of this facility are particularly compelling to us, we do not envision renewing this facility in September.

Similarly, we have excess and unneeded capacity with our credit card segment's lower-tier originated portfolio master trust; the next facility renewal under which doesn't occur until March of next year. While we are optimistic that the liquidity markets will normalize somewhat in 2009, and while we don't know what our investors' posture will be at that time, we are somewhat comforted by the fact that we can easily forego unneeded funding capacity within that master trust as well.

In summary, with our current and planned contractions in our receivables' levels and the excess capacity that this is creating under our financing and securitization facilities, we're moving in tandem with the general direction of financers and lenders who are limiting their exposures.

Our most significant challenge in the current climate, however, is maintaining the terms, principally advance rate, for the capacity that we actually need and use to support the funding of our receivables. On that front, we have a couple of audit finance segment facilities that expire in September and we are currently working to secure their extension or replacement at acceptable advance rates. Beyond these two facilities, our next significant renewal is from one our lower-tier credit card portfolio facilities in March of next year.

As David summarized, it's not a lack of capital on hand that constricts our ability to grow in the current environment, but our overall uncertainty and need for conservatism around the risks that the facilities representing the capacity that we need and use may not renew at our desired advance rates or at all.

The most noteworthy point of discussion on our second quarter GAAP results is the fact that our GAAP net loss was less than half the level of our managed loss. As we previously discussed with you and as expected, our March 31, 2008 Fair Value Assessments for the retained interest in our credit card securitizations [consequated] the higher level of expected losses associated with the peak charge-off vintages passing through in the second quarter and served to significantly offset the effects of those losses as they were actually occurring in our managed earnings' computations.

While we did not expect to fully offset the second quarter peak charge-off vintage losses by the discount built into our retained interest fair value as of March 31, 2008, there would have been a greater offset than what we saw but for the fact that we had just done our retained fair value assumptions as of June 30, 2008 to account for a couple of factors. Namely, to somewhat lower payment rates and late-stage delinquency roll rate degradation that we saw in the second quarter, coupled with the fact that we saw no measurable pickup as we had expected from the tax stimulus payments that many of our customers received in the second quarter.

All of these factors led us to adjust our June 30 valuation assumptions lower to reflect some of the economic stress that is evident in what we're seeing with respect to our customers. While these retained interest valuation factors represent the only significant deviations between GAAP and managed results in the second quarter, our earnings release reconciliation of GAAP and managed earnings contains GAAP and managed details that may help you with your further understanding and review of our GAAP and managed differences.

I also invite you to review our 10-Q filed earlier today, which provides greater insight into the performance trends of our receivables and our assumptions used to value our retained interest in our securitizations.

Let me conclude now by thanking you all for your interest in CompuCredit and your participation in our call. With that we'd be happy at this time to respond to any questions you may have.

(OPERATOR INSTRUCTIONS). Our first question comes from John Hecht with JMP Securities.

Good afternoon. Thanks for taking my questions. With respect to the near-prime conduit facility due this year, and the Auto Finance, a couple of questions. One is, you mentioned the $306 million near-prime facility. If you don't renew that, how much collateral is in that facility now and where can you put that collateral to?

That will go under our [Merrill] facility.

So you could just transfer it to the master facility and you have the sufficient capacity there.

Yes.

What are the advanced rates right now in the near-prime facility?

I think we've disclosed in conversations in the past the Merrill advance rate which is 92.5%. I'm not sure that we've ever really talked about the B of A advance rate. We do mention, John, in our 10-Q that historically has been our lowest cost facility and lowest advance rate facility within the originated portfolio master trust. So there's a slot both, like I said that lower advance rate facility to the higher advance rate facility represented by the Merrill facility.

Okay and can you give us a sense for how much in terms of portfolio or facility turnover in the Auto Finance segment how much we should expect in the September timeframe?

I'm not sure I understand the question.

In other words, you mentioned you have to address some auto securitization facilities in September. How much would that equate to?

It's represented on our balance sheet, John, and in our 10-Q. The first line item in our Note 9, I believe it is, dealing with mixed payables.

Okay. Second question, is the other income ratio dropped a lot and it was a little lower than our estimates, did either the charge-off rate or the fee charge-off exceed expectations? I guess a more generic question is that where should we see this ratio settle to after your peak charge-off period? And is there any other guidance you can give us on any of the other ratios where you should see them settle on the way, given that you're over the peak charge-off period?

I think first of all on the charge-offs, as I think I mentioned in my comments, we did see a little bit more in late stage delinquency roll rate than we had forecast, so that did increase the charge-offs during the quarter a little more than what we had forecast. And we do expect for those other income ratios to come back up pretty significantly towards the second half of the year.

The only guidance I gave on that is that we do expect them to increase, but they should be south of kind of what they averaged for the 2007 year.

Okay, I'm looking at this, so we should take the -- generally speaking we should kind of move -- you're recommending that we move things up towards (inaudible) revision toward the mean of '07 but not quite get there due to the second half of this year.

Right. John, back to your prior question. I just pulled up the note in our financial statements. In Note 9, there is $139.5 million payable on one facility and $63.4 million payable on another facility in September.

Okay and then last question; it appears that you're guiding us to a period of time where you won't have any account generation. What is the kind of amortization rate, the natural amortization rate of your portfolio?

Well, we can't spur different amortization rates based on account management actions and are looking at what we believe to be the best various account management tools on each of the separate portfolios to try to get the most cash out of them, make them the most cash flow positive while keeping as much value in the portfolios as we can. So each different portfolio has a different sort of amortization schedule on it. There's not kind of "okay this is going to reduce at a blank percent level" because it's done at each portfolio level rather than the whole thing.

Okay, then would be, I guess more generically would be the contraction we saw from Q1 to Q2 of this year be representative of what we should expect for the remaining part of this year?

Not at all, John. The contraction between the first quarter and second quarter of this year, just like the contractions from the end of December to March 31, reflected the peak vintages of accounts that charged off in the quarter in addition to just some contractions based on the fact that growth didn't correspond with the level of payments that we got from the other customers.

Okay, so that will slow in the context of -.

Yes.

Okay, thank you very much.

(OPERATOR INSTRUCTIONS) Your next question comes from Sameer Gokhale. Please proceed, sir.

Hi, thank you. Maybe I'll ask a fairly obvious question, but the cash created to buy back some of your convertible debt, about $20.5 million, clearly seems to make economic sense to do that from a return perspective given perhaps where those bonds might have been trading. But, given the focus on liquidity and maximizing liquidity, managing liquidity, why not just wait to do a translation like that. I think in your commentary you said that you might consider doing future, additional buybacks. So, I just wanted to get some sense on how you were thinking about that.

Sameer, we look as I mentioned earlier at our cash forecast over an 18 to 24 month basis and then continuously look at that, and therefore, whether it's an investment in a subsidiary where we're going to use some cash in that or it's an investment in some of our bonds, we're trying to look on a daily basis or at least a weekly basis on if we have excess capital, where should we invest that?

During the second quarter, we thought that was an excellent purchase, and as I mentioned, we may do that again. We will do that obviously in conjunction with making sure we feel good about our liquidity position over the mid to long term. But that was, you know, it's like an investment in adding some more accounts or investing some in the MEM business in the UK While capital is precious, that doesn't mean that we're not using capital to make what we think are very good investments. If we see a portfolio deal that comes along that we think that's got great return opportunities, we'll make an investment in that today.

Okay, and then I might have missed it in your comments, but the $210 million of available liquidity that you have now, I think that you said that through the end of this year you would expect that to decrease. Do you have some sort of a range to where we would expect to see that available liquidity decrease by the end of this calendar year?

We haven't put out a range, but I can tell you that we're pretty comfortable with where the trends are and our forecast that we feel real good about where we're going to end the year, and where we're going to be 12 months from now.

Okay, and then just a clarification, you know, given the FTC/FDIC lawsuits, are you currently able to originate loans via your existing bank partners, or is that on a hold so you're not originating any accounts? It seems like from what you were saying you were able to originate some accounts. I just wanted to clarify.

We are currently originating with two of our bank partners. We aren't originating very many accounts compared to where we have been. Part of our process even in a slowdown, we want to continue to be in the market so that if the securitization market or other funding sources show up that we will be able to quickly know where the market is, have been in the market and know what things are working and where the best sells are for us to go and try to get new customers. So while we are dramatically reducing, that's not to say it's at zero. We're continuing to issue through two different bank partners right now.

Okay and if you were to buy say a portfolio of loans, how do the mechanics of that work? Would you have to transfer those accounts into your current, the bank partners you're working with now, or would you just leave those accounts with the existing bank that's selling you the receivables and collect on those receivables? How do the mechanics work there?

Well, we have in buying previous portfolios, done it five or six different ways. We have bought and put it with one bank we're currently using. We've bought and left it at a bank. We have bought and put it with a bank that we hadn't used before. So there are several different ways in which we would accomplish that, and depending on the borrower extending would dictate how that would work out.

Okay, thank you.

Your next question comes from Moshe Orenbuch with Credit Suisse. Please proceed, sir.

Hi. I kind of had to jump on and off, so if you've mentioned this already, maybe I apologize. When you said when you break down the levels of some of the credit lines, will you be able to do that in a way that lowers the average cost to you?

Well, we are doing some re-pricing levels. That's part of the account management, and we are limiting some of the opened buy on accounts.

David, I'm sorry, I'm talking about your borrowing facilities, not your customers' credit lines.

Oh, I'm sorry. What's the question again?

As you're reducing some of your borrowing facilities, are you able to kind of do that to kind of optimize the cost to you?

No clearly, Moshe, there is with renewals that we've seen historically over the life of the Company, you avoid the unused fees which are significant. There are important as well as any upfront structuring fee or anything like that on the facility that's being renewed. As to the actual cost of funds, say on the originating portfolio or upper-tier portfolio, I mentioned before that our Merrill facility is more expensive, but then again it bears a substantially higher advance rate than our B of A facility, so recent for the increase in price is the higher advance rate. So, we feel comfortable with that.

A completely separate question, have you looked at what the impact of what the stimulus checks did in terms of the delinquencies and whether that had an impact and how much of that might have been influenced by other stimulus checks?

Well, it's kind of intuitive and testing against our expectations and the like, we did not see as big of an impact in payments coming in as we would have expected. Now, we don't know whether -- at the same time, though, some of our late-stage delinquencies, as I mentioned the roll rate was a little worse than what we had forecast. So, perhaps people in a late-stage delinquency just took the refund check and put it in their pocket. But we did not see as big of an increase in payments as we had might have thought based on looking at historical like the 2001 stimulus check that went out, as well as looking at sort of February and March normal tax refunds. So we saw slight differences, but we didn't see a big impact on the stimulus checks with our customers.

Great, thank you.

Your next question comes from Ted Crawford with Maple Leaf Partners. Please proceed, sir.

Thanks for taking my question. Sorry to harp on this, but I want to make sure I have this clear. The $300 million facility that's maturing in September of '08, how much do you have against that? How much is outstanding there?

We're using less than a third of it.

Okay.

As we have said before to John Hecht, we're simply going to transfer those balances over to another facility, but we have excess capacity right now. As I mentioned before too, we've been borrowing under the September facility because it had a lower cost to funds and a lower advance rate and could need the capital and said we'll shift some of that over. We still have excess capacity on the other facility.

Right, and you have one maturing in March of '09, is that right?

Yes.

And how much have you used of that?

It's $450 million facility and we want to say probably a little over half of it, around half of it.

There was another also maturing in '09; is that right in September?

There is a December '09 maturity that's a facility that's currently aiming down outside of our -- inside our low-tier of master trust.

I'm sorry, how much?

I'm sorry, you're right, September.

Okay, sorry, how much have you used of that?

Right now, we have outstanding $212.5 million in that facility.

Okay.

I was right the first time. I'm sorry. It is October 2009.

Okay. So those two are the only two maturing in '09; the March facility and the October facility?

Bear with me. Let me just run through this because I want to get this all straight here. There's an October turn deal of $299.5 million that we'll begin accumulating cash for; October 2009. And I was actually correct, it's December 2009 for which the $212.5 million on the $300 million amortizing facility is ultimately paid off.

Okay. How much availability in total do you have with facilities that mature after '09?

It's listed on Page 46 of our 10-Q that we just filed.

Okay, thank you for that.

But let me just do some quick math here; $1.6 billion.

Okay. Is that what you plan to do to decide not to renew these or you don't like the price when it's presented to you, just similar with what you're doing with the Merrill; with the Merrill facility? You're just going to use your available capacity with other facilities if you don't like the pricing of these maturing facilities?

Right and we did like the pricing on three of them, or a couple of years period of time we hoped at any rate.

Okay. That's all I have. Thanks for the clarification.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.