Atlanticus Holdings Corp (ATLC) 2003 Q4 法說會逐字稿

Good day everyone and welcome to the CompuCredit Corporation fourth-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 Finance, Mr. Allan Crawford. Please go ahead, sir.

Good morning. Thank you for joining us for CompuCredit Corporation's conference call to discuss the 2003 fourth 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 development, including future returns on our equity invested in our organic portfolio or other complementary lines of business, our ability to profitably grow our organic portfolio, the expected future performance of previously acquired portfolios, and the profitability of our new lines of business and other potential opportunities. Our actual results may differ materially from the plans or expectations reflected in those statements.

You should read the Risk Factors Section of our report on Form 10-KA for the year ended December 31, 2002, or 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 ever 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www.compucredit.com, in order to obtain a hard copy of the press release, our financial statement, or to listen to an archived version of this conference call.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 2003.

Thank you all for participating in this our fourth quarter 2003 earnings conference call. Today I will review our performance during the quarter as well as the full year 2003. And I'll discuss some of our thoughts and plans for the future. J. Paul Whitehead will discuss the financial metrics for the quarter in greater detail. After our prepared remarks, we will be glad to answer any questions that you may have.

We're very pleased to report earnings for the fourth quarter of $10.8 million or 23 cents per share. This brought our earnings for the year up to $117 million or $2.34 per share. As we look back on the year we're gratified that we were able to achieve these record profits for the year, while also putting ourselves in a solid position for the future. Even more importantly, we believe that we are in the best shape in our history to grow and prosper in the future.

The net interest margin was 20.2 percent in the fourth quarter as compared to 20.9 percent during the third quarter of 2003. The adjusted charge-off rate was 7.8 percent for the fourth quarter as compared to 8.9 percent in the third quarter. And at December 31, 2003, the 60 plus day delinquency rate was 12 percent as compared to 10.9 percent at December -- at September 30, 2003. This was in line with our expectations due to the seasoning of the portfolio that we purchased in August of 2003.

We're also very excited to announce that we have formed a new strategic relationship with Merrill Lynch that will allow us to once again grow our under served business organically. As most of you know we have refrained from growing in this area because we could not get the type of funding that we wanted. To grow in this area we need funding at an advanced rate that allows us to get good returns on our equity investments, as well as a mechanism within the funding arrangement that provides long-term reliability.

We have repeatedly said that we would grow the business again when we had the proper funding. We're happy to report that the new relationship with Merrill Lynch achieved our goals, and we're excited about this new relationship. As part of this, Merrill Lynch received warrants for 2.4 million shares of common stock. We believe that it is important to have our funding partner that also has a significant equity stake, such that they think and act like an equity holder as well as (inaudible).

We believe that we're in a very good position with all of our business activities today. I will briefly review each of those, and give you some color as to how we intend to grow each sector during 2004 and beyond. We anticipate expanding in our four complementary business activities, upper tier credit card originations, lower tier credit card and store value card originations, portfolio purchases, and charged-off receivable purchases. We will briefly discuss the history and outlook for each of these areas.

During the last 24 months we have not organically grown the upper tier sector of our under served market. We have continued to refine our testing and research in this market, but due to the lack of attractive funding we chose not to grow in this business. This decision has 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.

The new Merrill relationship allows us to grow a business we understand well, and one in which we're convinced we can grow profitably. We intend to take advantage of the market opportunities to grow in this area for the next few years. We know much more today than we have ever known about this sector, and we're looking forward to once again creating profitable growth in this attractive market. We're confident we will be able to maintain attractive growth rates in this sector of our business, while achieving attractive returns on our equity invested for the foreseeable future.

We did increase originations at the lower tier of our under served 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're enthusiastic about our ability to rapidly grow this business during 2004 and beyond.

This sector has very attractive returns, but we must have the discipline to properly manage credit limits. Our account management processes allow us to keep a close watch on credit activity to ensure that our customers are in fact acting responsible. 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've had over the last couple of years. We only want to grow when returns and the competitive landscape warrant that 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 store 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're excited about this new channel for growth, and we look forward to testing additional products that might be attractive to this customer base.

2003 was another good year for our purchased portfolios. All of the portfolios that we have purchased in the past performed as well or better during 2003 than we had forecast. The outlook as to the performance on these assets will continue to be favorable to our initial forecast.

While it is always difficult to predict the availability of additional portfolios, it is our belief that the market for slightly distressed credit cards portfolios will be strong for the next several months. Banking consolidation often provides an impetus for institutions to clean up their portfolios, which they might not otherwise do in a normal environment. We believe our experience and confidence in this market allows us to offer attractive pricing to portfolio sellers. Some institutions that have historically relied on deposits for funding have also felt pressure to reduce the size of their credit card portfolios for regulatory reasons. We're confident we're as well positioned as any company in the country to purchase these types of distressed portfolios.

Jefferson Capital is a part of our business that purchases and collects charged-off receivables portfolios. As with our distressed portfolio purchasing activity, one cannot predict the volume of business that will be available for purchase at a return hurdle that makes sense for us. We have the infrastructure in place to succeed in this part of our business. And more importantly, we have the management team in place to allow us to succeed.

There are several competitors in the market, but many of our senior managers helped to create this industry in the early 1990s while at other companies. And we're very confident in our ability to grow and prosper in this area.

As I indicated, we're pleased with the economic performance of our business. We think that we are in a stronger position than at any time in our history. And we're excited about the growth prospects. We have repeatedly said that we would make our business decisions like a private company looking to maximize the long-term value of the business rather than looking for short-term gain. Over the last few years this approach has caused us to take a somewhat conservative approach to new account origination, but we thought that was in the best interest -- the best long-term interests of CompuCredit.

That discipline is what enables us today to be in a very strong position as we look to take advantage of the market opportunity to once again grow our business both aggressively, yet prudently. We believe we are now in a position we can grow our asset base, our profitability and most importantly, the intrinsic value of our business at a more rapid rate than we have done in the past. Now I would like to turn it over to J. Paul for his group.

David. First I will review for (indiscernible) benefit some of the key operating and financial statistics for the fourth quarter. Then I will move to discuss the details underlying our performance.

To recap again our results for the fourth quarter, we achieved GAAP net income attribute to common shareholders of $10.8 million, which represents income per share of common stock on a wholly diluted basis of 23 cents per share. As David already noted, our fourth quarter results added to what was already a record earnings year for CompuCredit. As such for the year we have earned $117.4 million in net income attributable to common shareholders, representing $2.34 per fully diluted share.

With our fourth quarter result our book value per share now stands at $11.10, up from $10.90 at December 30. Our equity to managed loans ratio also grew during the fourth quarter from 22.3 percent at the close of the third quarter to 24.5 percent at the close of the fourth quarter.

CompuCredit also ended the fourth quarter in a very solid cash position. We generated over $346 million in cash from our operating activities in 2003. We ended the year with unrestricted cash reserves of $111 million. However, this only tells half of what is a terrific story. With our completion in January of the new Merrill Lynch originated portfolio master trust facility, we have the ability today to draw over $150 million from that facility based on our current receivable levels. And we expect to be able to draw at least another 75 million more against that facility once our 2001 term securitization ability is repaid in August of this year.

With the signing of the Merrill Lynch facility, we have fully executed on a key strategic initiative undertaken during 2003, that is to solidify our cash and liquidity position so we can be better insulated from potential future market forces that may adversely impact liquidity for asset-backed securities issuers such as ourselves. Over the past couple of years our liquidity has been adversely impacted by declines in market advance rates against our originated receivables. This is a phenomenon over which we have had little or no control, and with respect to which, no amount of empirical data evidencing the relative strength of our portfolio over those of other issuers made a difference.

Because of the liquidity challenges that the past couple of years have presented to us, we embarked on an effort to ensure that at a minimum each of our securitization facilities would provide us with adequate cash flows to cover our anticipated servicing costs over the life of each facility. With the completion of the new Merrill Lynch facility, a new ten year amortizing series for the Embarkadero (ph) Trust that we completed in January and the Fingerhut series issued in the third quarter of 2003, this should now be the case for each of our securitizations. Each of our securitization trusts should on an ongoing basis distribute cash flows to us that are at least adequate to cover our servicing obligation.

Now let me give you a few more deals on the Merrill Lynch facility. First and foremost this new two-year securitization facility provides an advanced rate against the originated portfolio master trust receivables that is designed to allow us to once again grow the originated portfolio at acceptable equity return levels. The facility provides for an initial one year committed funding level of 1.25 billion, and subject to certain performance metrics, a committed funding level of 1.5 billion in the second year. Also subject to satisfactory performance it provides for additional one year renewal periods at the expiration of the initial two year term.

Finally, and as referenced previously, it provides for an orderly amortization of the facility at expiration in a manner that is expected to allow us to receive cash flows that are more than adequate to cover our servicing costs, while amounts borrowed under the facility are repaid by the originated portfolio master trust.

In connection with the new Merrill Lynch facility we issued to Merrill Lynch a warrant to acquire up to 2.4 million shares of our common stock at $22.45 per share. This warrant will be recorded in 2004 at fair value using the Black Shoals Model and will be amortized in this amount as an additional component of expense over the two year deal term.

Turning now to the economics of the managed receivables underlying our securitization, I should first note that including our 50 percent share of the receivables acquired in the first Providian acquisition in 2002, and our 62.5 percent share of the receivables acquired in the third quarter at our second Providian acquisition, we had 2.42 billion in average managed receivables during the fourth quarter, slightly lower than our third quarter average of 2.47 billion. As one evaluates the economic performance of the managed receivables underlying our securitization, it is important to realize that the 2.4 billion in average managed receivables reflects only our economic interest in the receivables. This is to say that this amount is already net of our partners' separate economic minority interest in these managed receivables.

As David also noted, key economic statistics for our portfolio of managed receivables during the fourth quarter include a 22.2 percent net interest margin versus 20.9 percent in the third quarter. And adjusted our economic charge-off rate is 7.8 percent versus 8.9 percent in the third quarter. And 60 plus day delinquencies of 12 percent as of December 31st versus 10.9 percent at September 30.

Two noteworthy items favorably impacted the net interest margin in the fourth quarter. First, our second Providian acquisition during the third quarter of 2003 contributed to a favorable net interest margin in the fourth quarter. As those of you who follow our Company will recall, when we acquire a portfolio our managed receivables credit card data excludes the acquired receivables and related accounts which at the time of purchase were either closed or a late delinquency status. These accounts were in the process of being 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 statistic in the early post acquisition months and relative to the overall size of the portfolio, there are fewer finance charge charge-off within our computation of net interest margin.

While one might have expected to see some normalization in the net interest margin in the fourth quarter based on the seasoning of the acquired Providian receivables during the fourth quarter, a second factor contributed to the strength of the 20.2 percent net interest margin, and actually offset to some degree the seasoning effects in the fourth quarter associated with the acquired Providian receivables.

Our 20.2 percent fourth quarter net interest margin includes the effects of a reclassification of discount associated with one of our prior acquisitions. From credit quality discount to the accretable yield component of our purchased discount. Because actual charge-offs associated with this prior acquisition have been far less than originally estimated, a $98.4 million excess credit quality discount amount has been reclassified to the accretable yield component of our purchased discount, and is being amortized as accretable yield into our net interest margin over the remaining expected life of the acquired portfolio, thereby increasing or net interest margin.

The improvement in are adjusted, or economic, charge-off rate from 8.9 percent in the third quarter to 7.8 percent in the fourth quarter simply reflects improved collections, fewer principal charge-offs, and higher recoveries on our managed receivables during the fourth quarter.

Finally the rise in our 60 plus day delinquencies from 10.9 percent at September 30 to 12 percent at December 31st is consistent with the typical seasonality patterns that we experience in the fourth quarter each year, as well as the aging of the acquired Providian receivables into late-stage delinquency buckets in the months that have passed since the acquisition in the third quarter.

Based on all these measures concerning the economic performance of our managed receivables, as well as a reduction in our fourth quarter operating ratio, an improvement in our other credit card income ratios largely attributable to the performance of the lower tier product offerings with its principally fee-based income, as David discussed, we experienced economic performance for our managed receivables during the fourth quarter that slightly exceeded the economic performance of these receivables during the third quarter.

During the first quarter of 2004 we anticipate making marketing investments to grow the originated portfolio again, as well as making investments in other new offerings like our Purpose Solutions though our value cards. With these new 2004 investments in the first quarter, we anticipate first quarter economic performance on our average managed receivables to be just under two-thirds what we experienced during the fourth quarter of 2003.

Now turning to our GAAP net income, we discussed in our third quarter earnings conference call the fact that we expected much lower fourth quarter GAAP earnings than we achieved during the third quarter of 2003. Our $56.5 million third quarter GAAP net income was favorably impacted by certain infrequent items, which we knew we would not repeat in the fourth quarter. These included the favorable effects of the Fingerhut Trust retained interest exchange in the third quarter, our FAS 140 gain associated with securitization of a second Providian acquisition during the third quarter, and the favorable effects of our discounted purchase prices for the second Providian receivables acquisition on our charge-off rates used in our third quarter income from retained interest computation.

As we look forward to 2004 from a GAAP earnings perspective, we expect to realize favorable effects on GAAP earnings associated with draws that we plan to make during 2004 on the new Merrill Lynch securitization facility. We should also emphasize as we did in our third quarter earnings call that we do not expect to earn any further GAAP income from retained interest associated with the Fingerhut portfolio until the third quarter of 2004.

The facility within the new Fingerhut Trust is a so-called turbo facility, which for practical purposes means that we will not be receiving any material cash flows or income from the Fingerhut Trust, other than with respect to our servicing, until the third quarter of 2004 when all the bondholders should be repaid.

Similar to the Fingerhut portfolio as mentioned during our third quarter earnings call, we do not expect to experience any further income of significance from our equity method investment CSG LLC, which owns the retained interest associated with the first Providian acquisition, until the middle of 2006. As you 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.

We plan to discuss all of the above items in more detail in our 10-K filing. As far as our GAAP earnings go we should once again emphasize that with the way that we finance our business, that is through securitization, we always have the potential for a lot of peaks and valleys in our GAAP net interest. We recognize this. We manage our business by looking at the underlying economic performance of the assets that we manage and the investment that we make.

We'll continue to focus on ensuring that we make investments in assets and manage our investment in those assets with an eye toward the longer-term horizon and toward earning significant returns on equity that our shareholders have entrusted with us.

On behalf of both David and me, let me now thank you for participating in our fourth quarter earnings call. We will now open things up to any questions that you may have.

(OPERATOR INSTRUCTIONS). Moshe Orenbuch of CS First Boston.

This is actually Doug Harter filling in for him. I was wondering if you'd give us a little more clarity around the advance rate on the Merrill Lynch facility?

Sure, the advance rate is the low 90s, which is in keeping with the number that we had indicated we would have to get to crank back up that origination (inaudible).

Sameer Gokhale with Bear Stearns.

I have a question about the originated portfolio, and I just wanted to clarify something there. Looking at some of your historical 10-Q filings it just seems that the originating portfolio as it currently stands is contributing little, if anything, to overall profitability on a managed basis. So I was wondering the driver of limiting profitability there seems to be more the higher charge-off rates as opposed to the higher funding costs that is limiting the profitability. So going forward, I know you have said you have done some testing in the tiers of your -- of the subprime market -- the upper and lower tiers. But what gives you increased confidence that you can have more profitable growth in that originating portfolio? Is it just the advance rates or you are you seeing something else that is giving you more confidence? If you can describe some perspective?

That's a good question. When you look at our originated business that we have originated over the last four years, what you see is very high profitability early on. And then we were in a position where we had to, because of the funding, the inability to get attractive funding, we had to actually shrink those portfolios pretty dramatically. And so the shrinking of the portfolio meant that we weren't increasing the size and were actually reducing people's lines and that kind of thing, such that we had very limited profit as we were shrinking.

Now I will also note that most of the time when we have seen portfolios -- credit card portfolios that were in a fast shrinking mode, and we took our origination business from about 2.3 billion down to around 1.3 billion, most companies that have had to have that kind of contraction have seen dramatic losses as well as large increases in default rates and that kind of thing. We have been able to maintain a steady-state loss rate through that shrinking. And we know that from testing that we have many, many areas to go after in the market today that are highly profitable.

And once again to really get a sense for the profitability and how we intend to grow that business again, you have to go back a few years to when we were in growth mode in that business. As you know, and as I indicated in the prepared remarks, for at least the last 24 months we have actually been shrinking that portfolio. So it hard -- it is sort of apples to oranges looking at the performance last quarter versus what we think is going to happen over the next few quarters. It makes more sense to go back and look at some of the data from 1999 and 2000 where we were in a growth mode of that sector of our business.

I have a follow-up question. Is it possible for you to give us some sort of breakdown what percentage of your managed earnings in the fourth quarter came from -- your co-originated portfolio versus the acquired portfolios versus your collections business?

We are currently evaluating that data breakout for inclusion in the 10-K as to whether -- which we will be providing in that document. So at this time we are probably just not prepared to do that as we sit on the call today.

In terms of the warrants that you have issued to Merrill Lynch, could you give us an indication of what the strike price in on those warrants?

We said it in the prepared remarks. It is 22.5 a share.

And then my last question is, I just wanted to clarify something. Did I hear correctly that in the first quarter of 2004 you expect say the managed earnings to be something like two-thirds of your fourth quarter earnings, or did I completely mishear that?

We expect that the portfolio will perform on an economic basis at two-thirds of what percentage (indiscernible) of what we did.

(OPERATOR INSTRUCTIONS). Nathan Greenwald of John Levan and Co. (ph).

Can you give us a little more clarity on what you expect marketing expenses to look like for Q1 '04 and the entire fiscal year?

In the fourth quarter of this year we were at about $4 million or so. And we are really right now working to finalize our marketing plans for the year. I could see first quarter numbers probably being close to 150 percent or 200 percent of the fourth quarter numbers. But we're still trying to finalize all the details around the marketing effort there.

Could you talk a little bit about how you see the model for origination looking going forward? Is it to be Web based? Is there a particular marketing avenue or some segment that you will be pursuing?

It is the upper tier, the near prime or the upper tier of the subprime area is the area where we're going to see more of the growth coming in terms of balanced growth.

As to channel --.

The channel is going to be primarily direct mail. And we will have some Internet going on, and we may look to do some telemarketing and that kind of thing, but it is going to be primarily direct mail.

Gentlemen, at this time there are no further questions. We will turn the conference back over to you for any additional or closing remarks.

Once again we would just like to thank you all for participating. And I look forward to talking with you in the future.

That does conclude today's conference. We do thank you for your participation.