Atlanticus Holdings Corp (ATLC) 2004 Q2 法說會逐字稿

Welcome to the CompuCredit Corp. second-quarter 2004 earnings results conference call. Today's call is being recorded. At this time I'd like to turn the call over to the Director of Finance, Mr. Jay Putnam. Please go ahead, sir.

Good morning and thank you for joining us for CompuCredit Corp.'s second-quarter earnings call. Before the get started I would like to remind you that today we will be making forward-looking statements. These forward-looking statements include all statements of our plans, beliefs or expectations of future results or developments including our plans and expectations with regard to earnings per share; growing our originated portfolio toward value card operations and previously written off receivables and collections operations; acquisitions of portfolios, assets or complementary businesses from third parties; the performance of our originated and acquired portfolios including net interest margin and net charge-offs and general economic conditions.

You should read the risk factor section of our report on form 10-Q for the quarter ended June 30, 2004 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 should ever have any questions you would like to discuss. You may also access our website in order to obtain a hard copy of the press release, our financial statement, or to listen to an archived version of this conference call.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 second quarter of 2004.

Thank you all for participating in this, our second-quarter 2004 earnings conference call. Today I'll give you -- I will review our performance during the quarter and give perhaps a little bit more color than usual about the philosophy underlying our decisions to operate and expand within the underserved consumer credit market. And I will discuss some of our thoughts and plans for the future. J. Paul Whithead 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 second quarter of $13.8 million or 28 cents per share. As we look back on the quarter and into the future we believe that we are in the best shape in our history to grow and prosper. The net interest margin was 20.2 percent in the second quarter of 2004 as compared to 19.9 percent during the first quarter. The adjusted charge-off rate was 8.8 percent for the second quarter as compared to 8.2 percent in the first quarter. At June 30, 2004 the 60 day plus delinquency rate was 9.6 percent as compared to 10.5 percent at December 31, 2003. These performance levels were in line with our expectations.

As those of you who have followed our company know, we started our business with the philosophy of serving the needs of our customers; that is customers who we long ago found to be underserved by most in the mainstream consumer credit market. To that end we have done well economically and our customers have done well also. At the risk of citing an overused phrase, we really do believe that this can be defined as a win-win combination.

During the spring of 2001 we began experimenting with a new credit card offering to consumers with FICO scores below those of our traditional customer base at the time. We made this largely fee-based credit card offering to those consumers with the sub 80, the sub 580 FICO score band. Based upon the positive results generated by this product offering to date, we plan to aggressively continue our growth in this market over the coming 12 months.

When we started seeing these kinds of results a few years ago we began to put together a strategy to offer a broader suite of services and products to this underserved population. We started Jefferson Capital late in 2002 for example, with the recognition that we could profitably recover on charge-off accounts and help people who had a charged-off account to re-establish their credit history.

Around the same time we also began to study the emerging stored value debit card market so that we could offer a valuable service to consumers who did not have a bank account. We are pleased to report that we have signed a multiyear agreement with KeyBanc to be the sponsor of this program. We've conducted a successful launch of this initiative and we will commence a national rollout of our strategy over the balance of this year.

This is a very rapidly growing market and we believe that we can be a leader over the next 5 years. Our primary strategy in this part of our business is to partner with grocery stores and check cashers to market these products at the point-of-sale.

Another opportunity for serving our customers with a broad array of services is through ownership of the physical storefronts. To that end we closed on the acquisition of a 300 story lending chain called First American in the second quarter; and earlier this week we closed on another acquisition that brings our total store count to approximately 450 stores located throughout 14 states. These stores principally market short-term consumer loans that average approximately $300 and they typically allow our customers to avoid costly bounced check and late fees instituted by financial services companies, utilities and the like.

Our intention to organically grow this division and to continue looking for additional acquisitions. We also seek to expand the scope of our product offerings within these stores and to expand our marketing channels and delivery mechanisms for these products.

As part of our due diligence in this area we have closely studied consumer satisfaction levels and we have found them to be even higher than the exceptional levels we have experienced within our credit card business. The feedback we are getting leads us to believe that we can create a similar win-win for consumers and ourselves in a fashion similar to that of our sub prime credit card and Jefferson Capital activity.

In summary we are excited about our growth prospects in the future. We have added several complementary products and services that can be delivered through multiple delivery channels to better serve the immediate needs of our underserved and unbanked customers. We see these products and services as meaningful contributors to our earnings over the next several years. More and more CompuCredit is transforming itself from a credit card company focused on a discrete market to a provider of a full suite of financial services that appeals to the 90 million or so people in the U.S. who comprise the underserved and unbanked population.

We are very optimistic about this segment -- of the consumer credit market in which we operate and we are pleased with the economic performance of our business. We continue to think that we are in a stronger position than at any time in our history and we are excited about our growth prospects. Now I'll turn it over to J. Paul for his review.

Thank you, David. First let me review some of our key operating and financial statistics for the second quarter, after that I'll discuss some of the underlying performance details. To recap our results for the second quarter, we achieved GAAP net income attributable to common shareholders of $13.8 million which represents income per common share on a fully diluted basis of 28 cents per share. After the effects of our second-quarter activities our book value per share now stands at $11.93, up from $11.77 at March 31st. Our equity to managed loans ratio also grew to 31 percent at the close of the second quarter, up from 29.2 percent at the close of the first quarter.

Our liquidity position remains very solid. Toward the goal that we mentioned in our first quarter conference call, we've continued our focus during the second quarter on reducing our cash balances to minimize our overall cost of funds. Reflecting these efforts, we further reduced our unrestricted cash balances to 49.6 million at June 30th versus the 69 million in unrestricted cash that we had at March 31st. Our strategy here is to reduce our draws against our available securitization facilities until we have specific needs for the funding available through these facilities thereby resulting in lower cash balances and reduced interest costs flowing through our income from retained interest and securitized receivables.

Given the completion of our 1.25 billion 2 year variable funding facility in January of this year, we are confident in our ability to draw additional cash from this and our other facilities to meet our liquidity needs as they arise during 2004. As of June 30, 2004 our collateral base within our originated portfolio master trust was sufficient to allow for additional cash draws of 116.6 million against our existing securitization facilities. This available draw actually increased to 171.5 million on July 15th based on additional collateral that we freed up upon the payoff of our only remaining originated portfolio master trust term securitization facility on July 15th.

As far as the economics of our receivables are concerned we managed average managed receivables of approximately $2 billion during the second quarter of 2004. These receivables consist of receivables underlying our credit card securitizations and loan and fee receivables on our balance sheet. As one evaluates the economic performance of our managed receivables it's important to realize that the $2 billion in average managed receivables reflects only our economic interest in the receivables. This is to say that this amount is net of our partners' separate economic or minority interest in the two Providian portfolios that we acquire.

David previously noted the improvement in our net interest margin which is up from 19.9 percent in the first quarter to 20.2 in the second quarter. Now that the receivables from the second Providian acquisition is seasoned through each of our delinquency buckets, we generally expect greater stability in our net interest margin. However, based on reductions in the levels of our finance charge and late fee charge-offs, our repricing efforts, and the effects of expected account additions within our originated portfolio we saw some improvement in our net interest margin during the second quarter and we anticipate even more improvement during the third quarter.

With respect our net interest margin and our other income ratio statistics, we note that the net interest margin and operating income ratios for all prior periods reflect a reclassification of all fee charge-offs with the exception of late fees as an offset to the operating income ratio rather than the net interest margin. Given the growth that we have experienced and expect to continue to experience with respect to our largely fee-based card offering, the consumers at the lower end of the FICO scoring system, this classification became necessary during the current quarter to better match finance and fee charge-offs against their respective income component.

The modest increase in our adjusted or economic charge-off rate from 8.2 percent in the first quarter to 8.8 percent in the second quarter principally reflects the fact that the acquired credit card portfolios have fallen as a relative percentage of our total portfolio of managed receivables. Our net charge-off rate actually fell from 15.7 percent during the first quarter to 14.8 percent in the second quarter. However, more of our charge-offs relate to receivables to which credit quality discounts established at portfolio acquisition dates do not apply. That is to say that relative to our recent past, our charge-offs increasingly reflect new newly originated receivables from card holder purchases generated in periods after our acquisition.

Finally, the decrease in our 60+ day delinquencies from 10.5 percent at both June 30 of last year at March 31 of this year stands at 9.6 percent at June 30 of this year is consistent with our belief that we're seeing some broad based credit quality improvement within each of our managed receivables portfolios. Based on all these metrics we experienced economic performance for our managed receivables during the second quarter that exceeded our expectations for the quarter. We expect even stronger performance on our managed receivables during the third quarter; performance that we expect should significantly exceed the third quarter consensus sell side analyst estimates that were issued during the second quarter.

Turning now to our GAAP results, we once again note that because we finance our business through securitizations our GAAP net income can be volatile. A comparison of our second-quarter 2004 results against our second-quarter 2003 results is illustrative of the impacts of securitization accounting on our GAAP results.

While our 10-Q filed yesterday sets forth several reasons for our differing second-quarter income levels between 2003 and 2004, a significant factor here is the impact of our Fingerhut securitization facility. For both the 3 and 6 month periods ended June 30, 2003 cash that came to us through the then existing Fingerhut securitization facility generated significant GAAP earnings to us; earnings that largely did not exist during the 3 and 6 month periods ended June 30, 2004.

Because of the so-called turbo nature of our new Fingerhut securitization facility, cash flows from the Fingerhut facility to us were largely suspended during the first 2 quarters of this year. However, because of the payoff of this Fingerhut facility early during the third quarter this year, we expect a resumption during the third quarter of material cash flows to us and hence we expect to realize material GAAP income levels from the Fingerhut receivables and succeeding quarters. I would invite you all to review our second-quarter 10-Q filing for additional details underlying each of the factors affecting our reported GAAP earnings.

As we have consistently noted in our prior investor communications, we remain focused on the identification and pursuit of investments that will produce significant returns for our shareholders, not on investments that will necessarily produce attractive short-term GAAP earnings results. He continue to believe that there are attractive opportunities for meaningful and profitable organic growth for CompuCredit and for acquisitions of portfolios and businesses that complement our existing platform for serving the needs of underserved and unbanked consumers. We feel very good about the $15.9 million of capital that we put to work during the second quarter in connection with our $109 million First American acquisition, and just this week, as David mentioned, we closed another $34 million acquisition and put another $17.5 million of our capital to work to further extend the reach of our micro lending platform.

We will continue to work aggressively to put our over $200 million of available liquidity to use for the benefit of our shareholders. Also, however, as we did during the second quarter this year, we will look to continue our efforts to repurchase CompuCredit shares on the open market at prices that we find attractive. Let me conclude now by thanking you all on behalf of both David and me for participating on our second-quarter earnings call. We will now open things up for any questions that you may have.

(OPERATOR INSTRUCTIONS) Moshe Orenbuch, CSFB.

Could you talk a little bit about the prioritization of the use of your existing cash of the cash that's coming in? And essentially you did issue some debt, can you repurchase that? How available are other acquisitions? Maybe as a sidebar, why all of a sudden have they become available in such significant numbers? And how to prioritize share repurchase which you mentioned along with those and growing the receivables and all the other things that you've talked about?

That's a good question, Moshe, because that is probably the area that we are spending as much time as anything else right now is -- going through that prioritization process in terms of looking at the opportunities that are out there both in the acquiring of companies, acquiring of portfolios and finally acquiring of our stock. And in terms of how we go about that, that's, as I said, from the executive management team that's really what we're focused on right now. Our business lines are running with what we believe to be very good management in each line. And so we're looking and saying "okay, one of our most precious resources is that cash that we have" and how best to use that.

We've certainly thought at times about not borrowing money to close on, for instance, First American acquisition. We believe that rates that we borrowed that money at and the opportunities that we think are likely to be in place -- once again, for portfolios, for other companies or for buying our stock back will generate a much higher return than what we're paying for the loan that we have.

Great, thank you. But also just what made 2 of these companies come available on such a short period of time? Are there others? Can you talk about that a little bit?

These companies -- one of these companies we actually had been in kind of informal discussions with for a while. And I think the other one -- the follow-on acquisition, if you will, was one that probably happened because we did the first one and that seller looked and said "hey, I might want to do something along those lines as well". I don't know that we believe that there are a lot of additional acquisitions in the micro lending space. I think we're ready to make those, but we're going to have a lot of discipline there because we can also grow organically from the base we have and feel very comfortable with the management team we have in that organization to grow organically that business pretty rapidly as well.

Okay, just one last thing. You seem to kind of -- maybe this is my own reading of it -- but maybe tone down the Jefferson Capital discussion a little bit. Is that less -- I mean, the revenue rate is kind of flattish as opposed to growing. Is there less opportunity there, more on the micro lending or am I just reading something that's not there?

I would say that right now there's probably, in our minds, a little bit more opportunity on the micro lending side. As you know, there are public companies out there in the same business as Jefferson Capital and our belief from being in that business in one form or another, at least the management team here for 15 years, is that you really have to have a very firm discipline in the charge-off business to make good long-term money. so sometimes you have to be in the market heavily, sometimes you have to be a little bit on the sidelines. That's why I think you are hearing a little bit of that with Jefferson Capital. It is fairly competitive right now, we are seeing a few good deals but it is not as -- it doesn't have the same level of upside opportunity as the micro lending does right now. Now six months from now that can change and that is why we want to have infrastructures in place in both those business lines such that when the market does shift and give us something that we are ready to take advantage of it.

The other thing, Moshe, to realize is that we use the cost recovery method and under that method it doesn't yield the same type of results that the interest method would if you will say, so that you're not going to see growth based on the fact that we got to recover basis first on the portfolios that we are acquiring.

Great, thanks.

(OPERATOR INSTRUCTIONS) Sameer Gokhale (ph), Bear Stearns.

I had a question about this acquisition in Q2. I noticed that in your detail of how much cash you paid versus the goodwill and the other allocation of the cash between the different assets there didn't seem to be any substantial amounts of receivables incurred in the purchase. This looks like sort of a short cycle lending business, you mentioned 30 days or less so this is a timing issue that didn't have a lot of receivables that came with the business or is there something else?

No, as you mentioned, Sameer, it's a high turnover business. The receivable balances are relatively modest. In fact, they're disclosed in our notes to our financial statements -- the receivables associated with that acquisition. There's a roll forward of our on balance sheet, loans and our fees receivable balance, and it illustrates the dollar amount.

Great, I'll take a look at that. And then the other thing is -- and maybe this is included also in your filing -- but can you tell us what this acquired company generated in terms of revenues, expenses and net income for the full year of 2003 just so we can get a sense for what the earning contribution -- the annual earnings contribution is going to be from this acquisition?

We had not planned to discuss that in the call today.

Okay. Can you at least tell us if the management team also came over from the acquired business? I think they did not, but I just want to make sure.

Yes, we had a couple of people -- we had much of the management team come over from the acquired business and we've also brought on, prior to making the acquisition, a couple of people that we believe are the strongest in that industry that we know of. One of the guy's name is Jerry Robinson who's been around that micro lending industry for probably 7-8 years and has been involved in a lot of the larger companies in that area. And our head operations guy in that area is a guy by the name of Eddie Scoggins who's also been around that area for a long period of time. So we actually got the top management that we were going to have for that business before closing the acquisition.

Okay. And can you give us a sense for -- in this business, this micro lending business, what were -- you had mentioned the average loan amount is something like $300. Can you tell us of that $300 loan amount what is the breakout of revenues typically associated with that in terms of net interest margin versus fee income? It seems to be a pretty heavily fee driven product. But if you could just clarify that that would be great.

Sameer, you're right, it is a heavily fee driven market. But one of the things that I want to emphasize and talked a little bit about earlier is that a lot of our strategy for having the store fronts is that we want to be in a position to get the people in that unbanked or deeply under banked area that direct-mail and telemarketing doesn't always work with. So while we have bought these companies that are in the micro lending business, we think that these same storefronts can be used for our stored value cards, our debit card product, some of the other products and services that we're looking to offer in that lower tier area. We also think that a lot of these people are going to end up with one of our low-end credit card products.

So part of what you're hearing us is that when we look at income from this or that or what have you is that we think that this is another area and avenue to expand our product offering to really the same customer base that we've been dealing with for several years. And so that's really what we're excited about is this is another way for us to get services and products to our customers. Our customers want those products and services. And we think that as we expand in that area we're also going to have an expanded product and service line in that area such that there's somewhat of a blurring of which piece of this came from credit card, which piece of this came from a micro loan, which piece of this came from a debit card program. But in general to your question, our debit card or stored value card business and our micro lending business is going to be heavily fee oriented and our credit card products are going to be much more the other.

Specifically, because I think it's actually addressed in the 10-Q as well, the income from these particular activities is going to be reflected -- at least now and into the future as far as I can see -- as fee income as opposed to net interest margin or as opposed to the interest income line item on the income statement.

Great. And then my last question is -- I know you couldn't give us specifics on what the earnings contributions were from this business or what this acquired business generated in '03, but -- and how should we think about the incremental contribution to earnings in terms of a return on investment or any other sort of metric that drives earnings for this acquired business?

I will tell you that when we put capital to work we won't put it to work unless we think it's going to generate north of a 25 or so percent (indiscernible).

Okay. Great, that's very helpful. Thank you very much.

Gentlemen, there appear to be no further questions at this time. I'd like to turn the call back over to you all for additional comments or closing remarks.

Thank you for joining us for CompuCredit's second-quarter call. That concludes our call.

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