Atlanticus Holdings Corp (ATLC) 2003 Q3 法說會逐字稿

Good day and welcome to the third-quarter 2003 results 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.

Thank you for joining us for CompuCredit Corporation's conference call to discuss the third-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 any statements of our plans, beliefs or expectations of future results or developments including our future profitability in GAAP income, the expected performance of acquired portfolios and our new lines of business and potential opportunities. Our actual results may differ materially from the plans or expectations reflected in those statements. You should read the risk factor section of 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 after results to differ from the results reflected in the forward-looking that we make today.

Thank you 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 www.CompuCredit.com in order to obtain a hard copy of the press release, our financial statements or to listen to an archived version of this conference call.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 Hannah to give you an overview of CompuCredit's performance in the third-quarter of 2003.

Thank you, Nancy, and thank you for participating in this our third-quarter 2003 earnings conference call. Today I will give you an overview of our performance during the quarter and I will discuss some of our thoughts for the future. J. Paul Whitehead will review some of the financial statistics for the quarter in greater detail. After our prepared remarks we will be glad to answer any questions that you may have.

We're pleased to report earnings for the third-quarter of $56.5 million or $1.11 per share. This was a record quarter for CompuCredit as we have never earned more than a dollar a share in any other quarter during our history. While this number does include some infrequent items that J. Paul will discuss, we are very pleased with the underlying economic performance of all of our business lines.

Our earnings for the first nine months of the year were $106.6 million or $2.13 per share. The net interest margin was 20.9 percent in the third-quarter as compared to 16.4 percent during the second-quarter of 2003. The adjusted charge-off rate was 8.9 percent for the third-quarter as compared to 11 percent in the second-quarter.

At September 30, 2003, the 60 plus day delinquency rate was 10.9 percent compared to 10.5 percent at June 30, 2003. As I indicated we are very pleased with the economic performance of our various business lines. We believe that we have withstood a difficult period of time and underserved segment of the credit card market and we have been able to grow our profitability due to our ability to rapidly change and take advantage of the opportunities that presented themselves.

Our portfolio of purchasing business once again had another good quarter. Through an LLC with Merrill Lynch affiliates, we purchased a portfolio of loans from Providian of approximately $824 million of face value. This was a mutually beneficial transaction with Providian and we are confident that it will be a good transaction for CompuCredit.

The portfolios that we have purchased previously continue to perform at or above our expectations. We remain cautiously optimistic about our ability to purchase additional portfolios during the future. There continued to be portfolios that we believe will be sold and while the price competition is greater than it might have been 12 months ago, we are hopeful that we will continue to have opportunities to purchase portfolios that generate a healthy return for CompuCredit.

While we are hopeful for new portfolios we will not chase a deal that does not have appropriate return levels for us. We are confident that are unique experience and expertise in this market gives us a leg up on others that do not have the same level of expertise with these underperforming assets.

Our traditional account origination in the underserved segments continued to shrink during the third-quarter in line with our expectations. We have said for some time that the leverage in this market does not make sense for us to grow when we can more efficiently grow our profits in other areas. Fortunately, based on the economy and some greater stability in the overall credit card market, we believe that the leverage in this area may be improving some. We believe the underlying economics of this business makes sense but only at the right funding costs and advance rates.

Our Jefferson Capital business continued to perform well although we did not make many new purchases during the quarter as pricing wasn't as attractive as we would like to see. As we have indicated before we will grow this business when they pricing on portfolios makes sense to grow it and we will maintain when pricing is below the thresholds that we have set.

As you may recall we have been originating accounts at the lower end of the FICO scores with more of a fee-based products. A portion of our business that we refer to as our sub-prime business. This business continues to generate nice returns for our investment and we expect to continue to grow this business in the attractive competitive environment where we now find ourselves. While our sub-prime business is not currently generating significant income for us, it is making a positive contribution to our earnings today and is expected to do so as we move forward into 2004 as well. We are pleased with this business and we are confident it will be a nice addition to our productline for the future.

We have outlined numerous times that our business model is one where we may have lumpy GAAPP earnings streams for our business. When you're able to securitize a portfolio or releverage a portfolio, both of which we did this quarter it can have a positive impact on GAAP earnings. Similarly in quarters following a securitization or a releveraging of assets, you can experience significantly lower GAAP earnings depending for example on how cash flows back to you from your securitization facilities.

When running our business weekend to let the GAAP earnings consequences fall where they fall and focus instead on the economic performance of each asset class. We are very happy with the current economic performance of our assets and we are cautiously optimistic that the future will continue to show this same type of positive economic performance for our business. Now I would like to turn it over to J. Paul for his review.

First I will go over for everybody's benefit some of the key operating financial statistics of the third-quarter before discussing the details underlying our performance. To summarize again our results for the third-quarter we achieved GAAP net income attributable to common shareholders of $56.5 million, which represent income per share of common stock on a fully diluted basis of 111 per share. This brings our year-to-date GAAP earnings attributable to common share holders to $106.6 million or $2.13 per share on a fully diluted basis.

Taking into account our third quarter's results we grew the book value of our company per common share by another $1.03 per share to $10.90 per share at September 30. Our equity to manage to loans ratio remained consistent with the end our second-quarter at 22.3 percent reflecting the strength of our overall capitalization level. We also ended the third-quarter in a healthy cash position. To date in 2003, we have generated over $300 billion in cash from our operating activities and notwithstanding significant investment activities that we have undertaken throughout the year and in the third-quarter specifically, we ended the third quarter with over $100 billion in unrestricted cash reserves.

We've also completed a number of financing transactions that paint a positive picture around our liquidity for months to come. First, our first term deal within our originated portfolio Master Trust has been repaid in the amount of $627.4 million.

Second, we also secured a Pair of D (ph) series against our second term deal within our originated portfolio Master Trust. We began accumulating towards this deal accumulation period requirements in October.

Finally, we were able to releverage our Fingerhut assets in a retained interest exchange at generated $27.3 million in current cash for us and that reset our compensation for servicing portfolio so as to ensure that are servicing compensation will cover our cost of servicing the portfolio. Having accomplished this and having structured a securitization of our second Providian acquisition in a way that ensures that we receive compensation for servicing that also covers our servicing cost; we now receive monthly cash flows representing compensation for servicing each of our acquired portfolios that totally cover our monthly cost of servicing each portfolio.

Now let me turn to the economics of the managed receivables underlying our securitizations before then discussing some of the items reflected in our third-quarter GAAP earnings.

Including our fifty percent share of the receivables acquired in the first Providian acquisition in 2002 and our 62.5 percent share of the receivables acquired this quarter in our second Providian acquisition, we had $2.47 billion in average managed receivables during the third-quarter. Slightly higher than our second-quarter average of $2.36 billion. These relative average managed receivables levels are reflective of the positive effects of the second Providian acquisition in early August, offset by some liquidation that we experienced for our originated portfolio given our previously communicated decision to limit our marketing in account origination average within our traditional underserved market.

Key economic statistics for our portfolio of average managed receivables during the third-quarter include, our 20.9 percent net interest margin versus 16.4 percent in the second-quarter, our adjusted or economic charge-off rate of 8.9 percent versus 11 percent in the second-quarter, and our 60 plus day delinquencies of 10.9 percent as of September 30, versus 10.5 percent as of June 30.

Each of these managed portfolio statistics has been favorably impacted by the second Providian acquisition during the third-quarter. As of those of you who follow our company will recall, when we acquire portfolios our average managed receivables credit card data excludes acquired receivables and related accounts which at the time of purchase were either closed or had a late delinquency status. These accounts are in a process of a charged off by the seller due 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, in early post-acquisition months, and relative to the size of a portfolio there are fewer finance charge charge-offs within our computation net interest margin, fewer principal charge-offs and fewer account delinquencies.

As we saw beginning with the fourth quarter of 2002 and in the months that followed our first Providian acquisition and the Fingerhut acquisition, each of our net interest margin, adjusted charge-off ratio and delinquency rate statistics will normalize in the months following an acquisition with the seasoning of our acquired portfolios. That is to say that the accounts that were not excluded at the time at acquisition aids into later delinquency buckets and begin to charge-off.

Notwithstanding the favorable effects of the second Providian acquisition on our 60 plus day delinquency rate, our delinquency rate did rise approximately 40 basis points as we expected reflecting late summer seasonal payment patterns that we have seen in prior years as well.

Turning back to our GAAP net income, David previously mentioned that our $56.5 million third-quarter GAAP net income was favorably impacted by certain and frequent items. I will begin with a discussion of these items and then turn to some other components of the third-quarter GAAP income that are not expected to repeat themselves for several quarters.

All the data points that I will discussed here are presented on a pre-tax basis. The first point of discussion here would be our third-quarter exchange of our retained interest in old Fingerhut trust for $27.3 million and a retained interest in a new Fingerhut trust which owns a collateral security interest in the old Fingerhut trust. Under GAAP, the $27.3 million of cash that we receive was taken into our third-quarter income from retained interest.

Second, our securitization of the receivables of our second Providian acquisition generated $31.4 million of securitization income during the third-quarter, our portion of which was 19.6 million after giving effect to Merrill Lynch's minority interest.

Other things to factor into our GAAP earnings picture going forward included fact that we do not expect to earn any further GAAP income from retained interest associated with our Fingerhut portfolio until the third-quarter of 2004. The facility within the new Fingerhut trust is a so-called turbo-structure which for practical purposes means we will not be receiving any cash flows from the Fingerhut trust other than with respect to our servicing until all of the bondholders are repaid. This fact pattern compares to one in which we received some Fingerhut cash flows during the third-quarter of 2003 which contributed to $22.2 million of third-quarter income from the Fingerhut retained interest above and beyond the $27.3 million that I mentioned previously.

Similar to the Fingerhut portfolio as we mentioned in our second-quarter 10-Q, we do not expect to experience any further income of significant until they middle of 2006 from our equity method investment in CSGLLC (ph) which owns the retained interest associated with the first Providian acquisition. As you all will probably recall the securitization facility underlying our first Providian acquisition is currently amortizing in a manner that provides no cash flows to us other than for servicing and payments on some bonds that we purchased.

I should also note that beyond the $30.4 million securitization income that we experienced in the third-quarter associated with a second Providian acquisition, our GAAP accounting for the retained interest in that securitization yields another $39.3 million of income from retained interest during the third-quarter, our share of which after minority interest was $24.8 million.

As we move forward into the fourth quarter and beyond, our FAS-140 models will produce declining income from retained interest associated with the second Providian portfolio as we begin to experience credit losses on post-acquisition generated receivables. That is, credit losses based on face amounts of the post-acquisition generated receivables rather than credit losses based on our disaccounted purchase price for the acquired receivables.

All of these items will be discussed in more detail within our 10-Q which we will be filing within the next ten days. We thought it was important now to share these items with you to set some expectations regarding the significantly lower GAAP earnings that we see for the next few quarters. This could very well change however, if we have another acquisition and another securitization.

To summarize a key point that David made earlier, the GAAP accounting for the way that we finance our business that is through securitization clearly produces a lot of peaks and valleys in our GAAP net income. We recognize this and we manage our business by looking at the underlying economic performance of the assets that we manage and the investments that we make. As we look at the economic performance of our business we see a very strong third-quarter and we expect to experience roughly comparable results in the fourth quarter as well.

We will continue to focus on ensuring that we make investments in assets and manage our investments in those assets with an eye toward earning significant returns on the equity that our shareholders have entrusted with us. Let me now thank you all for participating in our third-quarter earnings call and we would now love to open things up for any questions that you may now.

(OPERATOR INSTRUCTIONS) Sameer Gokhale with Bear Stearns.

I had a question about some of the pricing in your collections business. Looking at your last 10-Q just running some numbers there it looked like pricing was somewhere in a range of 1.5 percent for the first six months of 2003 and three percent or so in a second-quarter. Given that these are freshly charged off receivables from your securitized trust, could you give us some perspective on pricing trends? It seems to me that the pricing should be much higher than three cents or so on the dollar for freshly charged off receivables.

That is a good question. The lower number, the 1.5 number that I think you mentioned in the previous one was sort of old secondary, tertiary and quantinary paper that was sold. The newer number, the 3.3 percent price that I think you referenced, when you look at our business versus other businesses the type of asset that we have and that we look to sell is a sub-prime asset with a relatively low balance a $1000 balance maybe sometimes $2000 average balance versus an MBNA portfolio that might have a $5000 balance that started out as a upper prime type customer.

So the pricing actually we have -- know the market fairly well and we also at various times sold pieces of our business in an auction-like process to the market. So the price that we are paying is the price that is reflective of where the market is today and that price as you may know, the charge-off buying business has a fluctuating price scale and sometimes there are buyers willing to pay big numbers and other times there aren't.

But that is a number that based on the type of paper that we sell, the sub-prime nature of it, the way we work the business prior to selling is reflective of what the market identifies as the appropriate pricing for our business.

In going through your 10-Q there was some commentaries that the SEC requiring to change the accounting methodology in your collections business to a cost recovery method from an effective interest method and correct me if I am wrong, but I think the cost recovery method is probably more conservative in the earlier years of cash collections from the collections business and maybe less conservative in future years compared to the effective interest method, is that correct?

Yes, that would be correct. The cost recovery does require you to expense all of the recoveries until such time as you have paid for the cost, paid for the amount or accounted for the amount that you paid for the receivable. Then after that, your income comes in in terms of the collections just less your cost.

So you really have two things that happened. We chose the interest method because we thought that it was more reflective in income, resulted in a better matching of income. Our auditors agreed with that. We had some discussions with the SEC relative to registration of statement that we were trying to make effective and the SEC believed that with respect to our experience in this area that we did not have the requisite experience necessary to use the interest method. What we did is we restated the first and second-quarter results. It resulted in a 7 cent per share decline in first-quarter earnings per share and an increase in second-quarter earnings per share reflective of the fact that you mentioned that there was a deferral of income.

Let me really though explain what goes on with the cost recovery method. You basically as we collect cash and to date we have collected $50.1 million on the investments that we have made, but as you collect cash, you offset that against the basis of what you bought on a portfolio by portfolio basis. So you've got no income recognition but then at the same time you have got either our own servicing cost or third party commission rates which serve as an expense reduction, so there really isn't quite the same degree of matching that you get with the interest method.

So you're right, there is a deferral in income here. All of this is outlined in the amended second-quarter and first-quarter Q's that we filed last night.

As a quick follow-on on the Fingerhut purchases though, you are accounting for those under the effective interest method and not under the cost recovery method, is that right?

Not the Fingerhut retained interest in the credit card portfolio, yes. That was largely a performing end.

Okay. Thank you very much.

Doug Harter with Credit Suisse First Boston.

Hi. This is Moshe Orenbuch, am I on? We got a little mixed up there. J. Paul, could you just tell us how we should relate the minority interest as we are looking at the managed earnings basis?

We have got managed earnings for GAAP purposes that are reflected on our GAAP income statement and our GAAP balance sheet. Those minority interests statistics that we have provided on the underlying performance of our credit card portfolio don't include the average managed receivables themselves that I talk about in my comments, don't include anything but our 62.5 percent share of the credit card receivables underlying the LLC.

All of the economics if you will of the minority interest are excluded from the average managed receivables statistics that we have provided in our earnings press release, those operating statistics.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Ed Groshans with Moors and Cabot.

Good morning. I was wondering if you could just discuss FIN-46 and any impact that would have?

We have made an assessment of FIN-46. In fact we have got a disclosure to this effect in our 10-Q that will be coming out next week and we do not believe that FIN-46 will have any material effect on any of our current accounting or any of our current activities.

If I understood correctly, the portfolio purchase lowered some of the optics in the current quarter. Going forward with the charge-offs and the margins would you be looking for those to compress back to where we were seeing them in the prior quarter or towards the year ago period?

There are a number of things going on there. I guess you have got an improved economy that factors into what the overall charge-off levels will be. You have got a change in the mix of our asset that has occurred so there clearly will be as I mentioned some normalization in statistics but as far as seeing those return to earlier levels, we just have a different asset mix now and we have certainly a different economic environment that we are seeing with respect to delinquencies, charge-offs, etc.

With the charge-offs, that 8 to 11 percent type of range, is that a good range or given the economy is improving so I wouldn't expect to see it go all of the way back up but --?

Yes, I think that our approach is that we are happy to share the information in terms of delinquencies and charge-offs in the past and that kind of thing and we will note that our portfolio, our originated business has aged over time. And what has happened with other portfolios is as they have aged, their charge-offs typically go down some over time. We are not going to get into commenting on exactly where we think charge operates are going or not going, but in terms of where we feel the economic performance of our various business lines is, we are real happy with those across the board right now.

Thank you very much.

This does conclude today's question-and-answer session. At this time I would like to turn the call back over to David Hanna for closing comments and remarks.

Once again we would like to thank everyone for participating today and look forward to talking with you in the future.

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