During the last 24 months, we have not organically grown the upper tier business. We have continued to refine our risk testing and research in this market, but due to the lack of attractive funding for this area, we refused to grow the business. This decision required a great deal of discipline as we have recently seen, through the results of our testing, more market opportunity than at any time since 1999.
We have conditioned our growth in this area on funding that has two components: 1) an advance rate that enables us to achieve acceptable levels of return on equity; and 2) a mechanism within the funding that allows us to finance receivables for longer than 12 months, thereby alleviating the risk that the funding will be pulled from us on short notice.
We have now obtained both of these components through a strategic relationship with Merrill Lynch, consummated in January of this year. We are very excited about this relationship. It allows us to grow a business we understand well, and one which we are convinced we can grow profitably. During the next couple of years, we intend to grow our upper tier business at an annual rate between 10% and 15%. We know much more today than we have ever known about this sector, and we are looking forward to once again creating profitable growth in this attractive market. We are confident we will be able to maintain strong growth rates in this sector of our business while achieving attractive returns on our equity invested for the foreseeable future.
Lower Tier
We did increase originations at the lower tier of our underserved market during 2003. As this tier has lower capital costs and higher returns, we were able to derive attractive returns on our equity during 2003, and we are enthusiastic about our ability to rapidly grow this business during 2004 and beyond. This sector within our business has very attractive returns, but we must have the discipline to properly manage credit limits. Our account management processes allow us to keep a constant watch on credit activity to ensure that our customers are in fact acting responsibly. We intend to grow in this area, and we believe it will be a nice addition to our profit stream, but we will also maintain the discipline that we have had over the last couple of years – we only want to grow when the returns and competitive landscape warrant the growth.
We have also developed some new exciting products for this sector in order to appeal to even more potential customers. We have recently begun offering stored value cards through our Purpose Solutions Card. This product is similar to a debit card, and we have found, through our testing, that there is a great deal of demand for this type of product. We are excited about this new channel for growth, and look forward to testing additional products that might be attractive to this customer base.
Portfolio Purchasing
2003 was another good year for this part of our business. We were able to purchase a portfolio of approximately $824 million from Providian in conjunction with affiliates of Merrill Lynch. This transaction was another win/win transaction for the seller as well as CompuCredit. The seller was no longer interested in the market served by the portfolio and we were able to utilize our extensive expertise in that market to both improve some of the metrics on the portfolio, and expand our relationship with many of these customers. All of the portfolios that we have purchased in the past performed as well or better during 2003 than we had forecasted. Our outlook on performance of these assets over the next 24 months is favorable.