Atlanticus Holdings Corp (ATLC) 2003 Q2 法說會逐字稿

Good day, and welcome to the CompuCredit Corporation's second-quarter earnings 2003 conference call. Today's call is being recorded. At this time I would like to turn the call over to the Director of Investor Relations, Ms. Nancy King. Please go ahead, ma'am.

Good morning, and thank you for joining us for CompuCredit Corporation's conference call to discuss the 2003 second-quarter earnings release. Before we get started I would like to remind you that today we will be making some forward-looking statements. These forward-looking statements may include statements about our plans, beliefs, our expectations of future results or developments. Including our future profitability, expected performance of acquired portfolios and new lines of business, potential opportunities and new business strategy. Our actual results may differ materially from the plans or expectations reflected in these statements. You should read the risk factor section in our report on form 10-K for the year ended December 31, 2002 for a summary of some of the more important factors that may cause actual results to differ from the results reflected 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 web site www.CompuCredit.com in order to obtain a hard copy of the press release, our financial statements or to listen to an archive 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 second quarter of 2003.

Thank you, Nancy, and thank you all for participating in this, our second-quarter 2003 earnings conference call. Today I will give you a brief overview of the performance during the quarter, and I will discuss some of our thoughts for the future. J. Paul Whitehead will go over some of the financial metrics. After our prepared remarks, we will be glad to answer any questions you may have.

Our 10-Q was released yesterday afternoon, and we hope that you've had a chance to review that material. As I indicated last quarter, it is our hope that we have included enough information in our 10-Q for investors to understand our business. But we did want to give people a chance to ask clarifying questions about any of that material. We are pleased to report earnings from the second quarter of $20.3 million or 42 cents per share. Our earnings for the first six months of the year of $53.5 million or 1.08 per share are better than we anticipated. The net interest margin was 16.4 percent in the second quarter of 2003 as compared to 15.5 percent for the first quarter of 2003. The adjusted net charge-off rate was 11 percent in the second quarter as compared to 10.2 percent for the first quarter.

At June 30, 2003 the sixty-day plus delinquency rate was 10.5 percent, as compared to 13.3 percent as of March 31, 2003. As I indicated, we are pleased with the financial performance for the quarter but more importantly we are pleased and excited about CompuCredit's position and ability to profitably grow in the future. We have spoken for sometime about our desire to position ourselves such that we can take advantage of different opportunities that present themselves without being tied to only one or two particular strategies.

We are now confident that we are well positioned to take advantage of the opportunities that the market presents. We have also pointed out in the past, and I would like to point out today, that this may at times result in earnings that are not in a straight line. We may have periods of time where the earnings within our company are somewhat lumpy. But we believe that we have the ability to over the long-term, have an ever-increasing level of earnings.

This morning I would like to briefly discuss each of our various current lines of business and give you some insight as to the performance of each, as well as our view for the future of these lines. Our traditional, underserved originated business continues to shrink in size in accordance with our plans for this business. As we have previously indicated, the current ABS advance rates do not make this an attractive business for CompuCredit from a return on equity standpoint. And we believe there are other areas where we can deploy our capital to get a better return than this market provides.

Our plan is to continue to shrink this portfolio for the foreseeable future to free up the capital currently locked in this business for usage elsewhere. Notably, the performance metrics in this business actually showed general improvement during the second-quarter despite the shrinking of the portfolio. We continue to originate a small number of test accounts in this market, such that we can turn this origination engine back on at some point in the future if the advance rates on this sector change for the positive.

The overall return on assets of this business can be very attractive, but we will have to see better advance rates before we grow this business again. Now I would like to discuss our first Providian purchase. As you know, we bought approximately $1.2 billion of receivables last June in conjunction with affiliates of Goldman Sachs and Salomon Smith Barney for an LLC arrangement. That portfolio has performed in line with our expectation. As expected, that portfolio continues to shrink, but we believe there are many accounts within that portfolio that will continue to perform profitably for CompuCredit for many years to come.

As you may have seen, we recently closed on a transaction to purchase an additional $824 million, worth of receivables from Providian in conjunction with an affiliate of Merrill Lynch. The timing of this transaction works very well for us from a staffing perspective. In other words, as one portfolio is declining and the number of people needed for it is also declining, we now have a need for many of these people who would have been idle absent this new portfolio addition. We are excited about this purchase, and we believe it would generate a nice profit stream for us for the next few years.

Our Fingerhut portfolio also continues to perform well. We have continued to see performance on this portfolio that has met or exceeded our expectations. Our operations center in Minnesota has done a very good job in extracting value from this portfolio. Now I would like to talk a little bit about our charge-off recovery business conducted through our subsidiary, Jefferson Capital. We set up Jefferson Capital in late 2002 to take advantage of opportunities that we saw in the charge-off purchasing business. Some of you may know that my brother and I owned one of the larger companies in this industry from 1990 through 1995. Like many businesses, in the consumer financial services area, the charge-off buying business is one that is cyclical. There are times when the competitive landscape is such that this is an unattractive business and there are times when it is a very attractive business.

We set up Jefferson Capital because we believed that we have entered into one of the cycles that is favorable for this type of business. We have headquartered this business in the same location as our Fingerhut business, and as a result we have been able to realize some economies of scale even during the early stages of the business. We set up the Jefferson Capital subsidiary to enable us to concentrate the efforts of a management team that is very focused on this line of business. It also helps to have this business in a distinct subsidiary to enable us to comply with all of the laws and regulations pertaining to charge-off debt buyers.

Todate, most of the purchases have been (indiscernible)that we know extremely well. Fingerhut charge-offs as well as Providian charge-offs. We have also begun an aggressive campaign to begin buying other portfolios of charge-off paper, as well. We are excited about this line of business, having succeeded in this area in the past, we are confident in our ability to succeed in this business in the future.

Our origination business was more of a fee-based product at lower FICO scores within the sub-prime space is also continuing to go well. As we have indicated before, this is an area that should provide additional profits but it is not going to be a large segment of our assets. Due to a decrease in competition, the accounts we have added in this sector during 2003 have performed better than our original forecast.

Finally, as we have repeatedly said, we believe that there will be opportunities for us to purchase other credit card portfolios in the coming months and years. You cannot predict the timing of these sales, but we believe that we are in a better position than others to bid an attractive price to sellers and still reap attractive returns for the capital that we invest. In summary, we are pleased with the performance during the second quarter, and we are excited about the future opportunities. We are confident that we have all of the tools necessary to generate healthy returns on our capital over the coming years.

Thank you very much for listening to the call this morning, and thank you for your interest in CompuCredit. Now let me turn things over to J. Paul Whitehead.

Let me begin by giving a snapshot of some of our key operating and financial statistics before turning to a discussion of the underlying details of our performance during the quarter. Summarizing again our results for the second quarter, we achieved GAAP net income attributable to common shareholders of $20.3 million, which represents income per common share on a fully diluted basis of 42 cents per share.

This brings our year-to-date GAAP earnings attributable to common shareholders to $53.5 million, or $1.08 per share on a fully diluted basis. Taking into account the current quarter's results, we grew the book value of the company for fully diluted common share by another 40 cents per share to $9.87 per share as of June 30th. Our equity to manage loans ratio also grew during this quarter to 22.6 percent as of June 30th, reflecting the strength of our overall capitalization level.

We also generated $73.8 million in cash from operating activities in the second quarter and ended the second quarter with over 100 million dollars of unrestricted cash available for further investment opportunities. Including our 50 percent share of the Providian receivables that we acquired in 2002, CompuCredit average managed receivables during the second-quarter were 2.4 billion as compared with 2.6 billion during the first quarter this year.

As David previously explained, this decline was expected and is consistent with our overall strategic direction as a company. David also summarized our key managed portfolio performance metrics during the second quarter. Our 16.4 percent net interest margin, our adjusted or economic charge off rate of 11 percent, and our 60 plus pay delinquencies of 10.5 percent as of June 30.

As one looks out for the rest of 2003, each of these financial metrics will be favorably impacted by the second Providian acquisition that we just closed. As those of you who follow our company will recall, when we acquire a portfolio our presented credit card data excludes acquired receivables and related accounts which at the time of purchase were either closed or at a late stage of delinquency. In the hands of the seller. These accounts were in process to be charge-off by the seller to delinquency or 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 early postacquisition (indiscernible) fewer finances charge charge-offs within our computation net interest margin, fewer principle charge-offs and fewer account delinquencies. Our performance statistics will also be favorably impacted by a denominator affect that being the increase, because of the acquisition and our average managed receivables base within the denominator of our respective ratio calculations going forward.

Turning back now to our GAAP net income during the second quarter, we noted that last year's Fingerhut and Providian acquisitions contributed positively to our second-quarter earnings. Albeit at a diminished level relative to their contributions during the first quarter. As discussed more completely in our 10-Q and as we planned for in establishing our purchase prices for these acquisitions, the securitization structures underlying both of these acquisitions are in early amortization based on triggers that are tied to the liquidating balances of receivables serving as collateral within the trust.

As a result, future cash flows and GAAP income associated with these acquisitions will not be as great as it was, as we experienced last year and into the first quarter of 2003. Lower cash flows and GAAP income will continue with respect to these acquisitions until the investors in the securitization trust are repaid. Nevertheless, we continue to project an ongoing cash flows from the securitization trust will be more than sufficient to offset our cost of servicing the portfolios, even during the early amortization period.

We also saw continued improvement in the performance of our originated portfolio during the second quarter as compared to our experiences with this portfolio during 2002 and into the first quarter of this year. In general, the higher net interest margin, the lower charge-offs and the lower delinquencies that David and I both decided earlier contributed to improvements in the performance of the originated portfolio.

David also mentioned our new Jefferson Capital subsidiary that we formed in late 2002, to take advantage of opportunities that we see due to purchasing collection and defaulted credit card receivables. Both on the securitization trust that underlie our retained interest investments and from other third party investors, sellers. These activities generated $12.8 million of other operating income in the second quarter and $22.2 million of other operating income in the six months ended June 30, 2003 and they have also allowed us to utilize our excess collections capacity.

That concludes my comments, and once again on behalf of David, me and all of us at CompuCredit we thank you for participating in our second-quarter earnings release conference call. At this time, I would like to open things up for any questions that you may have.

(OPERATOR INSTRUCTIONS) Moshe Orenbuch of CSFB.

As you kind of think about the dimension of higher advance rates on your originated portfolio and the less desire to continue those originations in light of that, but you are also seeing at the same time kind of improved profitability there. Could you talk about what you think it might take to get those advance rates to a better position?

I think that as we look at our business and the excess spreads in our ABS trust, are all pretty healthy and have been for a long period of time. So it has been somewhat frustrating to us in that we believe that really we've been penalized by an overall market reaction, to some of what has gone on in the overall sub prime credit card space, not necessarily what has gone on specifically with our company. Fortunately, it appears that some of the stability might be returning to that. So we are hopeful that some time in six months, nine months from now that we see some improvement in that area. But candidly, like I say, we think that our data has supported better advance rates for a long period of time, and we though, are in a market that is dictated by the ABS (indiscernible) who are also looking at other issues.

And can you just kind of relate that to the need to affect what you term the paired structures to kind of continue?

Yes, we've got advance rates that we think that are acceptable in the paired structure that we are looking at right now. That is something that we would obviously always like to get a better advance rate, but we have factored in kind of the same level where we are at now in terms of planning purposes and that kind of thing.

Thank you.

(indiscernible) Brown with A. G. Edwards.

J. Paul, can you elaborate a little bit on the disclosure in the 10-Q concerning the accounting for Jefferson Capital?

There is a little bit of detail here that probably makes some sense to go through. First off, we filed a registration statement that we been working to make effective with the SEC for some period of time now, and in conjunction with this effort they have reviewed our past couple of Q's and our 10-K from last year. So we been talking with them in that process about a number of disclosure issues, etc. in our filings. We are in discussions with the SEC staff now over our use of the interest method to account for Jefferson Capital investment and acquired defaulted credit card receivables. This method is essentially the same method that we use for the first Providian acquisition and the Fingerhut acquisitions. And in general under GAAP the interest method is used if the amounts at time of the collections on investments are reasonably estimable and probable.

With the interest method one recognizes this purchase price for the portfolio of defaulted receivables in the case of Jefferson Capital as an asset on the balance sheet, and the asset is essentially recovered or amortized on the yield to maturity basis based on the timing and amounts of projected future cash flows that will derive from the portfolio. To this extent, the interest method yields income that is reflective of really the economic income associated with an acquired portfolio of defaulted receivables, because purchase price of the acquired portfolios is recovered and matched with the timing of amounts of future cash flows emanating from the acquisition.

It is also the method of accounting that is being used by other public companies engaged in the business of purchasing and collecting charged-off receivables. That's the method that we adopted in the first quarter for Jefferson Capital and used in the second quarter for the Jefferson Capital acquisition from the second quarter. You can contrast that interest method that we have adopted, a cost recovery method. And a cost recovery method is appropriate where a defaulted debt buyer cannot reasonably predict the timing and amounts of future cash collections associated with an acquisition.

Under the cost recovery method, future acquisitions attributable to acquired portfolio offset first against the recorded basis in the acquired portfolio. Income is then taken into account under the cost recovery method only to the extent that collections associated with that particular acquired portfolio exceed the purchase price of the portfolio.

If you look at this, basically the cost recovery method sacrifices the appropriate recognition of balance sheet asset values, and reporting of economic income within the income statement in exchange for conservatism in those instances where future collections on an acquired portfolio are not probable and where the debt buyer can't reasonably cannot reasonably predict the timing and amount of those future collections.

I appreciate it.

(OPERATOR INSTRUCTIONS) Caren Mayer with Banc of America Securities.

Just as a follow-up to Moshe's question, I wonder I know a lot of us would depend on what your advance rates are, but in the hierarchy of kind of opportunities you see out there, where your advance rates to get better would you be enthusiastic about the origination business, or do you feel like there is more opportunity and better returns to be had in the distressed portfolio purchase business?

Well, Caren, thanks for the question. As I indicated, the distressed market is one where we can get very healthy returns on our capital. But we believe that the return on assets in the origination business is pretty healthy, as well, with the right advance rates. So no, if advance rates came back, we would be pretty excited about getting back into that business in a big way. Some of the irrational competition that may have been in that business a year ago or two years ago, we think has rationalized such that people in that sector are going to be able to get good returns on assets. So we would look to grow that business again. If and when the advance rates take a turn for the better.

Not as an ABS, I don't know enough about the ABS market, could you give us a sense of what the delta is that is required to be from where we are today, how much do they need to improve?

Well, I think that from a -- what really you had happen here is that, I think the type of assets that we securitize and others in our business have securitized are somewhat different than the assets that Citibank puts on in their prime sector. And so when rating agencies review some of the metrics in our business versus Citibank prime business, you can't just take the same exact model and sort of apply that against it and come up and say, okay, we're going to put a stress case on these assets, the same kind of stress case we used on other assets.

So it is not so much the exact delta how much its going to improve. What I think is happening is that all of these types of assets, whether they are housed at CompuCredit or housed at Providian or housed at other places, it is becoming a long enough window where people can say, okay, I now see how these assets perform over a 3, 4, five-year period of time and also see how these assets perform in an economic downturn.

As we all know, the last couple years have not been a great economy for the customer base that we have or many others have. And I think that prior to that you didn't have securitizations that had these types of assets in them, so there had to be a pretty wide range on the stress case to get the buyers comfortable. At this point, I think we're going to be in a position as the economy improves some, for people to take a look backward and say, okay, we went through an economic downturn, here is how the metrics looked in an economic downturn, and I think at that point the stress case that is used will probably be improved a little bit to our favor, and that would mean that the advance rates would improve some.

And one follow up question on the net interest margin, was the majority of the improvement you just had, cause you had fewer charge-offs, you had fewer finance charge reversals? Or could you just walk us through the improvement quarter to quarter?

Generally it is the former that you mentioned; we just had fewer finance charge charge-offs during the quarter.

Thank you.

(OPERATOR INSTRUCTIONS) Moshe Orenbuch.

Could you maybe size the effort and kind of (indiscernible) talk about originating the sub prime higher yielding fee-based accounts, talk about that a little bit -- number of accounts or dollars?

Yes, generally during the early part of the year we were kind of looking at sort of a 10,000 account a month kind of run rate. We wanted to, as we indicated early last year, we had been testing in that market for a long period of time. And so we ramped up to about 10 a month. As I said, the results of those have been better than what we anticipated. And so now we are looking at cranking that up somewhat from those levels, and the exact number that we are looking at really depends on what the market is going to give us, because we're only going to stay in the areas that are real profitable. We're not going to really go down to the margin on those. So right now we know that 10,000 a month is sort of a slam dunk, but probably 20 or 25 is a slam dunk as well. But above that we are going to just wait and see as to what the markets given us.

The reason I ask is you sort of ended up with a declining period end balance in the originating portfolio that wasn't that significant. Pretty small.

On the originated business?

Yes.

Remember we shrunk that pretty good over the last 12 to 18 months, and a lot of the originated business that we have, while we intend to shrink it, it is not like we're trying to run it all off. A lot of that business we think is going to be long-term profitable for us. So it is shrinking, but it is shrinking at a slower rate than it was a quarter or two quarters ago.

Thank you.

(OPERATOR INSTRUCTIONS) Gentlemen, there appears to be no further questions at this time. I would like to turn the call back over to you.

Once again, thank you all for participating. We are, as I indicated, excited about our business and our future and look forward to talking with you again soon.

This does conclude today's conference call. At this time you may disconnect.