Atlanticus Holdings Corp (ATLC) 2002 Q4 法說會逐字稿

Good day and welcome to the CompuCredit Corporation fourth-quarter 2002 results conference call. Today's call is being recorded.

At this time, I'd like to turn the call over to the director of investor relations, Ms. Nancy King. Please go ahead.

Good morning, and thank you for joining us for CompuCredit Corporation's conference call to discuss the 2002 fourth-quarter earnings release. Before we get started, I'd like to remind you that today we'll be making some forward-looking statements. These forward-looking statements may include any statements of our plans, beliefs, or expectations of future results or developments, including our future profitability, possible portfolio acquisitions, and anticipated future growth and charge-off rates. Our actual results may differ materially from the plans or expectations reflected in this statements. You should read the risk factors section of our report on Form 10-K for the year ended December 31st, 2001 for a summary of some of the more important factors that may cause actual results to differ from the results requested in the forward-looking statements that we make today.

Thank you again for your interest in CompuCredit. Please feel free to contact me, if you have any questions you would like to discuss. You may also access our website, www.compucredit.com, in order to obtain a hard copy of the press release, our financial statements or to listen to an archived version of this conference call.

I will now turn it over to David Hanna, to give you an overview of CompuCredit's performance in the fourth quarter of 2002.

Thank you, Nancy, and thank you all for participating in this, our fourth-quarter 2002 earnings conference call.

Joining me now on the call today are Rich House, our president, as well as J. Paul Whitehead, our CFO. I'll give you a brief overview of our business and J. Paul will then go over the financial highlights. Finally, Rich will provide you with some detail concerning our operational and portfolio performance during the second -- during the fourth quarter, as well as our outlook for the future.

After our prepared remarks, we'll be happy to answer any questions you might have.

We're pleased to report earnings for the fourth quarter of $16.7 million, or 35 cents per share. This performance is in line with our expectations. During the quarter, we also took steps to build our cash reserves to allow us to be in a position to take advantage of opportunities that might exist in 2003. We ended the year with about $120 million in unrestricted cash, and this figure was up from around $60 million at the end of the third quarter.

Our business strategy has evolved a fair amount over the last few years, and continues to evolve, as you will hear today, as we give you an idea about our plans for 2003.

Our approach will be to continue to build upon our core competencies. One of the core competencies we have always emphasized at CompuCredit is our flexibility and our ability to react quickly to changing environments in the market, the competition, or the economy. We were able to achieve profitability during 2002 with a very difficult environment, and we have adapted our strategy to reflect the current environment. The liquidity markets continue to be unfavorable for our traditional lines of business, so we have made a decision that we will not grow our traditional underserved receivable base until we see a meaningful improvement in this area.

While we continue to see attractive excess spreads in this space, the current environment has put a damper on funding in this market at rates that we find attractive. Our traditional core underserved market will continue to shrink over the next several months.

We continue to be bullish on the prospects of buying portfolios. We believe that our company has more expertise in efficiently buying distressed portfolios of credit card assets than anyone else in the country. As most of you know, there is a tremendous level of scrutiny for all of the players in the credit card arena today. We think that some of the changes and increased regulatory pressure should mean that there will be some portfolio transactions during 2003 as companies look to shed some of their underperforming assets.

Based on conversations with numerous liquidity providers, we believe that there will be ample liquidity available to CompuCredit to purchase some of these portfolios. We also intend to grow our sub-prime business a bit. We have tested in this segment for a couple of years and we are confident that the market is ripe for us to enter into this segment in a larger way. We don't expect this business to grow to a large number anytime soon, but it should add some profits for the company during 2003 and beyond.

In summary, we are pleased with the quarter from a profitability standpoint, and operational standpoint, and an opportunities standpoint. We are confident in our ability to produce profitable growth through our new channels and we are convinced that we have the right people and tools in place to adjust and take advantage of changes in the marketplace as we move forward.

Now I'd like to turn it over to J. Paul Whitehead, so he can go over the financial results.

Thank you, David.

Let me start here by giving a few highlights for the fourth quarter before both Rich House and I dive deeper into detail on our financial performance during the quarter. First, as David mentioned, we achieved GAAP net income attributable to common shareholders of $16.7 million, which represents income per share of common stock on a fully diluted basis of 35 cents per share.

Our Fingerhut (ph) and Providian (ph) acquisitions earlier during the 2002 year continue their solid performance in contributing to our fourth-quarter GAAP earnings results, as well as to our build-up of some $60 million in additional cash during the fourth quarter.

As of December 31st, as David also indicated, we have over $120 million in unrestricted cash within the company. Taking into account the current quarter's results, we grew the book value of our company per fully diluted common share by another 32 cents per share, up from 8.50 per share at September 30 to 8.82 per share at December 31st. Also, our equity to managed loans ratio grew during the fourth quarter to 16% as of December 31st, versus 14.3% as of September 30, reflecting the strength of our overall capitalization level and an industry high among our competitors.

Including our 50% share of the Providian receivables, CompuCredit's averaged managed receivables during the fourth quarter were 2.9 billion, as compared with 3.1 billion during the third quarter. This $200 million decline in our fourth-quarter average managed receivables was expected, and in line with our communications with you all during our December 12th, 2002 investor meeting.

We added 53,000 new accounts in the fourth quarter and as David mentioned for the time being we've chosen to limit our marketing and account origination efforts, predominantly to response rate testing given the liquidity challenges that we see in the asset-backed securities market. Stated quite simply, while we can earn acceptable spreads, returns on assets with respect to our originated credit card assets, we have chosen not to originate these assets to any significant degree because the advance rates that we're seeing in the ABS markets don't allow us to get enough leverage to earn as high a return on equity as we can through other acquisition opportunities that we see on the horizon. We remain committed to deploying our capital toward those investments that will produce the highest rate of return for the shareholders.

Now, balanced against the pressures that we are seeing in the ABS markets on advance rates are the exceptional cash flows that we have generated from our operations in 2002, and a good liquidity environment for us on the acquisition front.

During 2002, we generated over $248 million in cash from our operating activities, and we were able to pay off all of the acquisition-related debt that we raised to fund our Fingerhut and Providian acquisitions.

Much like we experienced during 2002, we anticipate a good liquidity base in 2003 from which to raise the capital needed for our expected 2003 acquisitions.

During the fourth quarter, the net interest margin we earned on a managed receivables was 17.1% as compared with 21.4% during the third quarter. Additionally, the adjusted charge-off rate, or the economic charge-off rate as we refer to that in the past, was 9.2% in the fourth quarter versus 8.3% in the third quarter.

Finally, our 60-plus day delinquencies are up from 12.3% as of September 30, 2002 to 13.9% as of December 31st, 2002. As we explained in our third-quarter conference call, the relative softening of each of these ratios was expected during the fourth quarter, and it's principally the result of the close proximity of our Fingerhut and Providian acquisitions to the close of our third quarter.

Two factors were the principal contributors to the relative strength of the third-quarter ratios. First, when we acquire a portfolio, our presented credit quark (ph) add-up excludes (inaudible) and related accounts which at the time of purchase we either closed or had a late delinquency status. These accounts are in the process of being charged off by the seller due to delinquency or are likely to be charged off by the seller in the near-term. Effectively because of the exclusion of these particular receivables from our credit card statistics, there are, in earlier -- in early post-acquisition months fewer finance charge charge-offs within our computation of net interest margin, fewer principal charge-offs, and fewer account delinquencies.

Second, in explaining the relative strength of the third-quarter ratios is the so-called denominator effect - that being the increase through an acquisition in the average managed receivables space within the denominator of our respective ratio calculations.

In summary, post acquisition finance and principal charge-off levels, as well as delinquency levels normalize over time with the seasoning of the acquired receivables that were not closed during the late-stage delinquency at the time of acquisition. This is the phenomenon that you are seeing in the fourth-quarter numbers.

Finally, on the topic of our adjusted charge-off rates, like in the third quarter, our fourth-quarter adjusted charge-off rate reflects our charging to plant losses on our acquired portfolio against credit quality discount allowances that we established at the acquisition dates. This adjustment, effectively adjusting post-acquisition charge-offs by the portion of our credit quality discount that is allocable to such charge-offs is necessary to give us a true economic charge-off rate on our portfolios.

Lastly, to provide greater transparency with respect to all of the aforementioned ratios, we'll continue, as we did in the third quarter 10-Q to provide separate credit card performance statistics for our various portfolios. Also, as we've stated during our third-quarter call, we'll begin to post our -- on our website the monthly master trust (ph) reports underlying our two term securitization deals. The first of these reports for January 2003 should be posted on our website on or about February 15th, 2003.

Now, let me turn things over to Rich House, who will provide some further color on our portfolio performance during the fourth quarter and on some of our expectations with respect to portfolio performance throughout 2003.

Excuse me. Thank you, J. Paul.

I will provide overviews of our portfolios and review our strategy moving forward. To begin with, as J. Paul mentioned, our economic charge-off rate was 9.2% in the fourth quarter, and in line with our projections. Our corporate delinquency rate rose from 12.3% in the third quarter to 13.9% in the fourth quarter. As J. Paul discussed earlier, this is attributable to the fact that the Providian and Fingerhut portfolios are seasoning and filling up their later stage delinquency buckets. We anticipate the corporate delinquency rate will stabilize around this level and begin to diminish in the second half of the year. Correspondingly, we anticipate the charge-off rate to rise some and then stabilize. We still anticipate the corporate charge-off rate to be around 12% in 2003. The net interest margin was 17.1% in the fourth quarter. This was down from 21.4% in the third quarter for the reasons J. Paul discussed. Our current net interest margin is very strong, and we anticipate it will fluctuate between 15% and 17% for the remainder of the year. Averaging around 16 to 16.5% for the full year 2003.

Both the Providian and Fingerhut purchased portfolios are performing as anticipated. Our core underserved portfolio representing our master trust performed within our expectations with respect to the charge-off rate, the delinquency rate, and the excess spread. The charge-off rate was 15.2%. The 30 plus (ph) delinquency rate was 15.8% and the three-month average excess spread was 9.3%. Each of these metrics was consistent with our third-quarter results.

Notably, purchase volume was lower than expected in the fourth quarter. As a result, the master trust average receivables shrank $26 million or approximately 1.7% in the quarter. This is particularly unusual during the fourth quarter, which obviously includes the holiday buying season. We believe this was caused by continued economic weakness, which impacted our customers' purchasing decisions.

Now I'll briefly comment on our view of the liquidity markets.

The liquidity market remains robust for purchasing distressed assets. We are continuously reviewing portfolio acquisitions and have identified several liquidity partners who are willing to pursue these opportunities with us. This includes both asset-backed liquidity as well as equity or mezzanine liquidity. We remain confident we can pursue multiple distressed asset purchases simultaneously with the appropriate liquidity.

The liquidity market for our originated receivables does not appear to be improving. As J. Paul discussed earlier, while we continue to test-market, we are not currently investing in growing our core underserved business at this time. Hopefully, the liquidity for that market will improve over the remainder of the year. However, with the current industry turmoil and the economic environment, we believe that improvement is unlikely.

Moving forward, our strategy remains as I outlined in December. We're going to continue to pursue portfolio purchases. We are limiting our investment in our core underserved business. And we are finalizing our testing before launching products into the sub-prime market.

As I mentioned in December, we've been testing the sub-prime market for about two years now. The sub-prime product has lower credit lines and higher fees than our traditional products. Our testing indicates this is a very profitable business, and there appears to be robust consumer demand for this type of offering.

Currently, we are putting together the liquidity program for the sub-prime market and we hope to begin rolling out the marketing for the program in the third quarter of 2003. Fortunately, the liquidity needs for this program are not as great as the liquidity needs for our traditional underserved business. This is because the return on assets for sub-prime loans is very high, and therefore the required leverage to obtain it, an acceptable return on equity, is much lower.

We believe the relatively low reliance on leverage will enable us to thrive in this business, irrespective of the liquidity markets. In fact, our strategic move towards purchasing portfolios and originating sub-prime assets is driven by our belief that over the next couple of years, sub-prime lending may be deprived of rational liquidity markets. In other words, irrespective of our success and performance, liquidity may be difficult to maintain based on market perceptions or the failure of some of our competitors. Therefore, we are looking for business lines with very high returns, such as portfolio purchases or sub-prime lending. These businesses will enable us to generate excellent returns on capital, even in markets where financial leverage is sub-optimal. As a management team, and as major shareholders, we believe the focus on very high returns minimizes our risk while positioning the company for significant upside returns.

That concludes my comments and I'll turn it back to David.

Thank you, Rich, and now we'd like to open the call for any questions there may be.

Thank you. Today's question-and-answer session will be conducted electronically. To ask a question, press the star key followed by the digit one on your touch-tone phone. Again, that's star one for questions. Please make sure your mute function is turned off so your question will register in the queue.

Our first question, Mark Alpert (ph) with Deutsche Bank.

Good morning. A couple questions. One, when you take charge-offs against the discount in terms of the purchased portfolio, I was wondering how that works from an accounting standpoint and how do we know how much discount is left to absorb those charge-offs?

And I would assume that there's always going to be some normal level of charge-offs, and how you decide what goes against the discount and what goes against profitability.

And I might follow up, if I could.

Well, the answer to the question on the credit quality discount and how that's being absorbed and used over time is available in our public filings. We include it in our 10-Q, and it will appear in our 10-K as well, so you'll be able to see the remaining credit quality discount that is available to absorb credit losses on acquisitions.

And then -

Mark?

Yeah.

To give you an idea, though, on the second part of that question about how they -- how they're going to come down over time, the two portfolios that we bought back in 1998, the prime option and Bravo portfolios --

Uh-huh.

-- when we bought those, shortly thereafter they were -- the actual charge-off rate that we experienced was north of 30% on those portfolios, and over the last year, that -- those accounts, they've been rolled into some of the other portfolios, but those accounts experienced sort of a 12-ish kind of charge-off rate, so over time, we expect that the good accounts remain with us and continue to perform pretty well, not dissimilar from our traditional core business.

And you re-securitized a couple of the original portfolios to get more value out of them. Would you expect to do that with the Providian and Fingerhut portfolios at some point?

I think that's clearly a possibility, and we will always be looking at ways where we can pull additional value out of the portfolio to redeploy that capital.

And a little -- just lastly, I guess there's been a couple portfolio sales recently. I think Providian announced they sold First Select (ph). Were you involved in any of those?

We were not. The First Select portfolio is actually a charge-off portfolio. It was -- it was-basically, a lot of that was business that had charged off from other credit card issuers that Providian had purchased for a charge-off business they had.

While we're extremely interested in distressed accounts and accounts that may be at a discount, we're not in the business of buying charge-off paper.

Thank you.

And again, that's star one on your touch-tone phone for questions. And we'll pause just a moment. Please stand by.

Our next question, Rich Golenewski with Artemis.

Hi, guys. You've got $120 million in unrestricted cash on your balance sheet, which is roughly equivalent to almost half of your market cap and twice the size of your float. I guess my question is, I mean, how much cash do you need to do these portfolio acquisitions? You know, particularly if you have partners willing to invest, you know, equity or mezzanine capital. I mean, what are the other uses of that cash? I mean, theoretically you could buy in the float at $10 a share and still have cash left over. Just wondering if you could maybe touch upon that a little bit more.

Rich, you raise a good question because we do have excess cash currently, and as you point out, we have been able to purchase portfolios in the past without putting in a lot of our actual cash through -- through efficiently funding them with both asset-backed market as well as the mezzanine funding arrangements we've been able to arrange.

The-- you know, when you talk about the purchasing in the float and that kind of thing, we do have a stock buyback program that the board put in place I guess sometime during the second quarter, and so we will continue to look to make buying of stock when the opportunity looks good and favorable for us to do that.

Right now, we continue to see what could be some, you know, very nice buying opportunities, and while we certainly can obtain the mezzanine funding we need, in some cases we might prefer to do that all on our own because the returns might be very high. So we're constantly looking at how to deploy the capital, but, you know, clearly if we see that the acquisition market cools down and we don't have exceptional uses for the capital, then we would look to buy our stock.

Okay. Thanks a lot.

Our next question, Mark Alpert with Deutsche Bank.

I guess I'll take an opportunity for a follow-up. Could you explain the drop in the retained interest in credit card receivables securitized from September of 312 to December of 276, and then also I assume that's related to the drop in the income from retained interest in credit card receivables quarter to quarter?

A lot of that is just the cash that came in.

Exactly. I mean, you know, we -- on the -- particularly on the purchased portfolios, the retained interests from those portfolios, as cash is received, as those are treated as, say, you know, a contingent bond type investment, that cash comes in and reduces the retained interest value down based on the level of cash that's received in the portfolios. Then you have an interest accrual, like I talked about, on December the 12th, based on your IRR, to bring the balances back up based on the new principal balances after collection. So that's a function of the collections on the retained interest in predominantly the purchased portfolios.

And what about the drop on the income statement from -- on a GAAP basis from the 23.7 million income from retained interest in credit card receivables securitized to 8.5 million?

Okay.

Our next question --

Wait. Let me address that question, if we could.

Mark, the -- there's two factors there that are at play. First off, as you have lower principal balances that are caused by the cash collections on the purchased portfolios as I described before, you've got less of an interest income build-up within that income account. Effectively, you're -- you know, you're building up interest income on the principal balance, which is net of those cash collections, so the two really go hand in hand. And there's also some slight decline based on just the decline in our average receivables base that we talked about, the $200 million decline in average receivables during the quarter.

But there's no write-off of anything involved?

No, no, there's no -- there's been nothing extraordinary.

Okay. Thank you.

Our next question, David Hochstim (ph) with Bear Stearns.

My question has been answered. Thanks.

Our next question, Wendy Teramoto (ph) with W.L. Ross (ph).

Hi. Thanks. Sort of along the balance sheet issue, when I look at your retained interest in your credit card receivable, it pretty much accounts for, you know, over 60% of your net worth, so I was just wondering if you could maybe explain a little bit further in detail how exactly that is valued on a quarterly basis.

Well, it's actually on the original (inaudible) portfolio that we have, we use the approach that's described in FAS 140 and FAS 115, which is effectively we value these interests at fair market value at the end of every quarter. The basic process that's used to value the interest is to take into account expected payments rate -- payment rates, credit losses, yield on a portfolio, as well as servicing costs, and basically take a net present value, discounted cash flow approach to valuing the interest. On the purchased portfolios that I described earlier, the approach there to valuing those interests is very much akin to an investment in a contingent bond wherein you plot out your expected future cash flows from the portfolio investment, calculating IRR, and then you -- as you receive cash from the portfolios, you, you know, reduce the amount of the investment and then charge interest based on that reduced investment amount.

So that's essentially how it works. I'd be happy, again, to get into a more detailed discussion with you off-line, and if you take a look at our third-quarter 10-Q, we walk through the various assumptions and factors that are used in valuing the retained interests and obviously we'll have that in the 10-K as well when it comes out.

Okay. Maybe I'll do that because I just notice some, you know, swings in the discount rate that were used, and then I guess it also talks in your Q about using a independent financial advisory firm and I was just wondering, who did you guys hire to actually do that?

We hired an independent advisory firm to do that work in conjunction with our second quarter, and we really haven't disclosed that information in the past, and it was one of the major investment banks.

Okay. Thank you.

Again, that's star one for questions.

Our next question, Ari Schochet (ph) with Millennium Partners. Please press your mute button or pick up your handset.

Yes. I was mute. Sorry about that. Hi, it's Ari Schochet at Millennium. Two questions really. The first question is, you know, given the -- you know, just the speed of runoff and the loss rate, how long is it before you have to either make the decision to try and get some new receivables or to start, you know, lowering your expense base (inaudible) liquidation facility?

I didn't hear the second part of that, Ari.

I mean I guess -- what I'd like to know is, you know, for instance, in the Salt Lake facility, how long can that facility run before you need to get your receivables to, you know, have them work -

Oh, oh, oh,.

-- you know, close down or scale back (inaudible).

Right. We are staffed currently at a level that we believe we need to be staffed at for the current business we have through the latter part of this year. So if we did not pick up any new receivables until that point in time, we would look to start downsizing some of our collection facilities.

As we've pointed out, we expect that we will see some additional receivables between now and sort of late third, early fourth quarter, so we expect that as we get new receivables, that they will be used to -- for those people that we have in those facilities will be used for those new receivables as they play out in the same kind of curve that the ones that we currently have are playing out.

Okay. Great. That's very helpful. Second question is, how do I think conceptually about modeling how the economics of a portfolio purchase would work for you guys? Is it possible, you know -- I know that there's been different levels of information disclosed from the Providian and Fingerhut deals. Is there a way to just conceptually walk through how we should think about that, or how we should model that? What are the factors we would need to make assumptions on to be able to accurately do that?

Well, essentially the factors on a managed basis, if that's the way you're looking at it, are, you know, net interest margin, yield, charge-offs on the portfolios, and that gives you basically information that you need to be able -- as well as the average managed receivables balance is the information that you would need to be able to analyze portfolio performance there. And that information is -- or will be disclosed in our 10-K as it was in the 10-Q, at least with respect to the purchased portfolios as a whole, and then also with respect to our 50% interest in CSG, which is obviously -- that's the Providian receivables.

On a GAAP basis, it's a little bit more challenging in some respects, and it may be easier in some respects, but it's basically estimating our future cash flows from the portfolios and, you know, you can do that based on information we've provided in our past public filings, and then, you know, discounting those cash flows back to an appropriate valuation on our balance sheet.

Okay. Thank you.

Again, that's star one on your touch-tone phone for questions.

Having no further questions, Ms. King, I'd like to turn the conference back over to you for any additional or closing comments.

Again, thank you for joining us today, and your interest in CompuCredit.

This does conclude today's conference. Thank you for your participation. You may now disconnect.