Atlanticus Holdings Corp (ATLC) 2004 Q3 法說會逐字稿

Good day and welcome to CompuCredit Corporation's third-quarter 2004 earnings results conference call. Today's call is being recorded. At this time, I would like to call over to the Director of Finance, Mr. Jay Putnam.

Good morning and thank you for joining us for CompuCredit Corporation's third-quarter earnings call. Before we 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 growing our originated portfolio and stored value card 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 forward-looking information section of our report on Form 10-Q for the quarter ended September 30, 2004 and the risk factors section of our report on Form 10-K for the year ended December 31, 2003, 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 ever have any questions you would like to discuss. You may also access our website in order to obtain a hard copy of this press release, our financial statements, or to listen to an archived version of this conference call.

I will now turn it over to Rich House, President of CompuCredit, to give you an overview of CompuCredit performance in the third quarter of 2004.

Thank you, Jay, and thanks to everyone for joining this early morning after a long night of election monitoring. Today I'm filling in for David, who is unable to attend our conference call.

Today we're going to review our performance during the quarter, update you on the current state of our business, and share some thoughts about our outlook. J. Paul, our CFO, will discuss the financial metrics for the quarter in greater detail. After we finish our prepared remarks, we will be happy to answer any questions you may have.

Yesterday, we reported earnings for the third quarter of $37.9 million, or 75 cents per share. We continue to be pleased with the underlying economic performance of our business. Our earnings for the first nine months of the year were $69.4 million, or $1.39 per share. J. Paul will share other key performance metrics later in the call.

We continue to pay great attention to strengthening the long-term operations and success of our business. We continued to originate credit cards across the underserved spectrum, adding 152,000 gross new accounts in the third quarter. We see solid potential for our traditional credit card offering to underserved, near-prime customers, and we have been pleased with the results of the marketing of our lower-tier credit card offering to consumers with sub-600 FICO scores.

Aside from our credit card origination activity, which we consider to be one of our core competencies, we have maintained our efforts to diversify our business and expand our company's reach.

Those of you that have followed us for a while know that we have had success in the past in purchasing portfolios from third parties. In the third quarter, we again partnered with Merrill Lynch to purchase a portfolio of approximately $92 million in credit card receivables. We will continue to investigate other portfolios of various credit quality and size for acquisition in the future.

Now switching gears from credit cards, some of you may have seen our recent press release concerning our Purpose Solutions subsidiary, which focuses on stored value cards and merchant credit products. Purpose Solutions is off to a strong start in its initial year, and we believe it has potential to be a very profitable business for us in the future.

We continue to aggressively sign up merchants to offer our MasterCard stored value cards and point-of-sale loans to consumers. Through our partnerships in this space, combined with cross-selling through our other business lines, we feel this will help us deliver nice returns in the future. We also believe consumers will see great value in the Purpose Solutions product offerings, as they will have a cost-effective alternative at the cash register to costly bank and merchant NSF or overdraft charges. Merchants also have a strong incentive to partner with us, as these offerings help expand their own product sales.

In addition to our third-quarter credit card portfolio acquisition I mentioned earlier, we also acquired a 166 store lending chain called Venture Services (ph) in the third quarter. This brings our total retail storefront count to approximate 470 stores located throughout 14 states. These stores principally market short-term consumer loans that average approximately $300, and similar to our merchant credit product offerings, they typically lower consumer to avoid costly NSF check fees instituted by financial services companies, utilities, and the like.

Our intention is to organically grow this microlending operation and to continue looking for additional acquisitions. We also seek to expand the scope of our product offerings within these stores and cross sell some of our other products and services as we see opportunities to do so.

We closely study our consumer satisfaction levels for our consumers who take out these micro loans, and we have found to be even higher than the exceptional levels we would experience with our credit card business. This positive feedback underscores the fact that this is a service our thousand customers appreciate and truly value.

In conclusion, we were pleased with our economic performance so far this year and feel we have the momentum to continue our success into the fourth quarter of 2004 and beyond. We believe we are in a stronger position now than any time in our history and we are excited about our future. Now I'm going to turn it over to J. Paul for his review.

Thanks, Rich. First, let me review some of our key operating and financial statistics for the third quarter. After that, I'll discuss some of the underlying performance details.

To recap our results for the third quarter, we achieved GAAP net income attributable to common shareholders of $37.9 million, which represents income per common share on a fully-diluted basis of 75 cents per share. After the effects of our third-quarter activities, our book value per share now stands at $12.64 a share, up from $11.93 at June 30. Our equity-to-managed loans ratio also grew to 32.8 percent at the close of the third quarter, up from 31 percent at the close of the second quarter.

Our liquidity position continues to remain very solid, as we continue to focus on cash management to minimize our cost of funds. Subsequent to quarter-end, we closed on two separate and substantially identical $322 million term securitization facilities issued out of the originated portfolio master trust, one a five-year facility and the other a six-year facility. We are pleased to have long-term access to capital through these new facilities at what we believe to be appropriately attractive and tight spreads over LIBOR.

Beyond these two term securitizations is the substantial liquidity that two conduit facilities and our $1.25 billion two-year variable funding facility continue to provide to us with respect to our originated portfolio master trust. Through these facilities and with our originated portfolio collateral base as it stands today, we have the ability today to draw over $225 million against our existing securitization facilities to meet our liquidity needs as they arise into the fourth quarter and beyond.

As far as the economics of our receivables are concerned, we managed receivables averaging approximately $1.95 billion during the third quarter of 2004. These receivables consist of receivables underlying our credit card securitizations and our loan and fee receivables on our balance sheet. As one evaluates the economic performance of our managed receivables, it is important to realize that the 1.95 billion in average managed receivables reflects only our economic interest in the receivables. This is to say that this amount of net of our partners' separate economic or minority interest in the portfolios we have acquired in the past through third parties.

We are pleased with the comparison of some of our key managed receivables statistics between the third quarter of this year and the third quarter of last year. Last year's third-quarter numbers reflected the typical benefits that we see when there is a large portfolio acquisition, like our Embarcadero acquisition last year. Notwithstanding this, however, our key interest margin, adjusted charge-off rate, and delinquency rate statistics for this year's third quarter are either close to or better than the statistics from last year's third quarter.

The net interest margin was 21.2 percent in the third quarter this year compared to 22.4 percent in the third quarter of last year. The adjusted charge-off rate was down to 8.3 percent during the third quarter as compared to 8.9 percent in last year's third quarter. Also at September 30, the 60-plus-day delinquency rate was 10.7 percent as compared to 10.9 percent at the same time last year. These ratios are consistent with our belief that we are seeing some overall credit quality improvements in our managed receivables portfolios.

We also saw our net interest margin improve 1 percent during the third quarter this year as compared to the second quarter this year, up to 21.2 percent in the third quarter from 20.2 percent in the second quarter. This increase was principally attributable to reductions in the levels of our finance charge late fee charge-offs, and new account additions within our originated portfolio.

Consistent with our historical seasonal payment and charge-off patterns, we do anticipate a lower net interest margin for the fourth quarter of 2004 when compared to the third quarter this year. We also expect that this year's fourth-quarter net interest margin will be lower than last year's fourth-quarter net interest margin based on the beneficial effects of last year's Embarcadero receivables acquisition on our last year's fourth-quarter numbers. The Embarcadero receivables had not yet seasoned through delinquency buckets and charged off as of the end of last year's fourth quarter, and this phenomenon favorably affected last year's managed receivables statistics.

The decrease in our adjusted or our economic charge-off rate from 8.8 percent in the second quarter this year to 8.3 percent in the third quarter this year reflects seasonality and the strong performance of our collection efforts. Barring new portfolio acquisitions, this percentage should drift upward as our purchase portfolios have matured and seasoned. Thus, a larger percentage of future charge-offs will be attributable to cardholder purchases made after portfolio acquisition dates, for which there is no offsetting credit quality discount.

Overall, we experienced economic performance for our managed receivables during the third quarter that were in line with our expectations. For the fourth quarter of this year, expected seasonal charge-off patterns and a substantial marketing and other product rollout investments that we are making will cause our managed receivables economics to decline relative to our third-quarter economics. Nevertheless, we expect that our fourth-quarter managed receivables economics will be at the low end of what we saw our sell-side analysts publish prior to our earnings release yesterday.

Turning now to our GAAP results. We once again note that because we finance our business and securitizations, our GAAP income can be volatile. Our 10-Q filed yesterday sets forth several reasons for our differing third-quarter income levels between 2003 and 2004, and I will briefly discuss some of the key drivers of these variances.

During last year's third quarter, we experienced significant income associated with our Fingerhut retained interest exchange and our Embarcadero receivables securitization, neither of which is a repeating transaction during the third quarter this year. Narrowing some of the gap created by these non-repeating third-quarter 2003 transactions was our desecuritization of our Fingerhut receivables, the profitability of our retained interest in our originated portfolio master trust, and our credit card offering to consumers at the lower end of the FICO scoring system, and the profitability of our microlending activities.

With our desecuritizations of Fingerhut receivables during the third quarter of this year, we essentially have taken the Fingerhut receivables back onto our books with the zero basis that we had in our Fingerhut retained interest. This means that as we to collect an estimated $129 million in future cash from the Fingerhut receivables, all of those cash collections will represent GAAP income to us. Moreover, we see GAAP income associated with the future amortization of a $29.9 million deferred gain associated with last year's Fingerhut retained interest exchange.

Finally, we also saw an increase in the fair value of our retained interest at September 30, 2004, with a commensurate increase in income from our retained interest in this year's third quarter due to the effects of a reduction in our residual cash flows discount rate used in our FAS 140 models. And these reductions were based on new market conditions that became apparent to us in connection with the two-term securitization facilities that I mentioned earlier.

I would invite you all to review our third-quarter 10-Q filing for additional details underlying each of the many factors affecting our reported GAAP earnings, several of which I have not mentioned here for the sake of brevity.

At the risk of lulling you to boredom with the same story quarter in and quarter out, we again need to reiterate that we are keenly focused on the identification and pursuit of economically sound investments in the long-term, not an investment that will necessarily produce attractive short-term GAAP earnings results. We 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 also favor very good about the almost $38 million of capital that we put to work during the third quarter in connection with our portfolio and microlending acquisitions, and we continue to aggressively pursue opportunities to put our over $250 million of additional liquidity to work for us.

Let me conclude by thanking you all on behalf of both Rich and me for participating in our third-quarter earnings call and for your interest in CompuCredit. With that, we would like to open things up to any questions that you may have.

Thank you, gentlemen. (OPERATOR INSTRUCTIONS) Moshe Orenbuch of Credit Suisse First Boston.

Could you maybe just expand a little bit on your plans for the pay day lending business? You have got some 450 or so outlets. What kind of growth rate would you expect? What are the profit implications, what kind of payback do you get on them?

Sure, I will talk about the growth strategy a little bit. Right now, we have about 470 stores and we expect right now to have, barring any acquisitions, around 500 by the end of the year. We believe this is a business that in organic rate we can grow at 20 to 25 percent a year pretty comfortably by just reinvesting some of our earnings.

In addition to that, we are also continuing to look at any acquisitions that may come available of a variety of sizes, anything from smaller acquisitions to ones that may have larger store concentrations. From a profit perspective, I think David and J. Paul may have addressed it last quarter, not necessarily in an explicit manner, but when the look at these operations, we're looking to achieve return on our capital in excess of 25 percent. And so we feel pretty comfortable about this business and the growth prospects.

Just to follow up, you are saying that the return would already have baked into it the investment costs -- that was that over 25 percent?

Yes.

Thank you.

Sameer Gokhale from Bear Stearns.

I just wanted to dig into this growth and other income a little bit. Could you give me a breakout for what you would say -- where is most of the growth coming from? Is it from the fee-based products, the low end of the FICO score type customers, or is it primarily from the pay day lending business, like a full quarter of income from the microlending business? Can you give me some sense for that?

I might refer you to the 10-Q that we filed yesterday. There is a table in the 10-Q that actually summarizes the fee income by broad category, breaking it down between the fees that we earn on our securitized credit card receivables, the income from the securitized Fingerhut receivables, the recoveries of previously charged off receivables activities. And there is the disclosure there of an other fee category of roughly $50 million that does comprise the categories that you mentioned. That income consists of, basically, the revenues that we have earned from the microlending business, the stored value card operations, as well as, as Rich mentioned, the card product offering to some sub-600 FICO score folks.

So if I look at your managed basis other income of 77 million, that is the detail that is provided in the 10-Q for the whole 77 million of managed basis other income, or are you talking about GAAP income?

That is GAAP income, GAAP other income, which should not differ too much from managed other income in proportion.

Okay. And in terms of the other income, can we expect less of a delta in Q4 and going forward from quarter-to-quarter, assuming that there is some growth in that number but just less of a difference compared to Q3?

I'm sorry. Can you repeat that one more time?

Yes. You had a big increase in your other income on a managed basis from Q3, so can I expect a lesser increase in Q4 compared to Q3 and smaller changes between quarters in other income going into 2005? Because I want to model out the other income number and I just want to find out is there going to be less of a difference, because there was a big increase in the other income number in Q3 compared to Q2.

Sure. I guess, Sameer, we did have the two acquisitions that we did in the microlending space. One was towards the tail end of the second quarter, so that is why you did not see the jump there. Then we closed another acquisition early on in the third quarter. So you did see some positive effects that might be greater than the norm by reason of those acquisitions that occurred, roughly impacting our third-quarter numbers more than the second-quarter numbers.

Sameer, if you look at what we can control right now, both in our microlending business on an organic level, you expect a smoother change. But potentially (multiple speakers) another acquisition and it could affect things.

But you are seeing acquisition effects there, there's no doubt.

Right. And then the lower-tier credit card lending, we are currently on an organic growth plan that we think will be consistent for the next few quarters, so you should not be seeing big jumps there.

Okay, that is very helpful. And then on the purchase of the credit card receivables, the $92 million face value, could you tell me what kind of discount you purchased those receivables at?

We really have not disclosed that, Sameer. One thing I want to do is I want to clarify some of the feedback I gave you on the other income answer relative to GAAP and maybe help to reconcile that with you, if I could a little bit. The income from the desecuritized Fingerhut receivables, which is on a GAAP basis the $28.7 million, that is not an item is going to be in your managed other income category, (multiple speakers) income category. In that, those economics are reflected in net interest margin for the Fingerhut receivables. And I just wanted to provide that clarification, so that helps to bring those numbers down a little bit more in line.

Okay, terrific. And I wanted to get your sense for some of the legislative issues surrounding the pay day lending or the microlending business. How have you thought about potential regulatory legislative issues in this business and, specifically, there's, I think, a rule where some microlenders may partner with some banks, and the bank's home state may have higher ceilings on pay day lending rates, which apply in any state where there might be branches. So that seems to be a bit of a loophole that people are complaining about. So how do you view that legislative risk or regulatory risk?

This is Rich. Let's just talk about that whole legislative risk, because it is something that I have been asked about several times. You are correct in when you look at microlending, there's really two models you can have. You can have a model where you are issuing with a bank partner that you were discussing. And you also have a model called the state model, where actually lending yourself within the state, and those states have explicit laws regarding and enabling microlending. So that's talk about those two separately.

First of all, about 75 percent of our business is in what we call the state model, where we're actually in states where the microlending is specifically enabled. And our organic growth is targeted almost entirely in those states where you have explicit enabling legislation. We have about 25 percent in what we call the "bank states," where we have a bank partner. Our view there is our bank partner has been through FDIC reviews and is explicitly following the FDIC guidelines for microlending. So we believe that we have a reasonable feel for the legislative risk, and we think we're minimizing that, particularly by expanding primarily organically in the state model state.

And finally, it is our view that, if you look at both the House and Senate, Republican and Democrat representation on the Financial Services Committees that there's a reasonable amount of support for enabling microlending. So we believe that anything we do has somewhat of a legislative risk, but we have a pretty good handle on that.

The other thing I might add is that we actually may operate a little bit different than some other folks with respect to the bank states that Rich mentioned. Under an agreement that we have reached with our bank partner, which is Community States Bank, we basically do not take on any credit risk associated with the servicing and origination activities and marketing activities that we perform for them. So our model is a little bit different based on that agreement than some others have.

Great, that is very helpful. And then my last question is on a different note. In your collections business, the Jefferson Capital business, I think based on your latest purchases in Q3, I think you expect to collect a little more than four times net purchase price. Is that more or is that less compared to what your expectations were last year in the same quarter? I did not go back to the math, but directionally it would be helpful to see if you expect to get more on the collections front than you did before.

I don't have that stat in front of me as to last year's stat, but I know that we expect to collect $64 million, $64.5 million in collections, and that we expect 68 percent of those collections over the next 12 months. I think that number may be down slightly from last year's third quarter, but I don't have that number in front of me.

Okay. Maybe we can talk about it off-line. Thanks a lot.

(OPERATOR INSTRUCTIONS) Ken Posner with Morgan Stanley.

This is actually Cameron Gafari (ph) from Morgan Stanley, and I just had a couple of follow-up questions on your microlending business. You indicated that you wanted to cross sell to the micro borrowers. Could you comment on that, as well as the synergies you have with your credit card operations?

As we have expanded our business, we clearly have our credit card lending products, but we also have our stored value products as well. And we believe but don't know with certainty that there is an opportunity to cross sell those products through the storefronts. What would like to do in the microlending business is bring in people and move them up the value chain over time with respect to our credit offerings. And so we believe that (technical difficulty) potential that these storefronts could become a nice distribution point for even further value-added services, such as our credit cards and or debit card products.

And in terms of other synergies with your credit card operations, is it just the cross-sell opportunities that you're focusing on?

At this point it is. Keep in mind we just completed these two acquisitions and so we're trying to absorb those before we expand any further. But there are some synergies associated with back offices and collections, potentially. But primarily, we think the synergies are focused on the cross-selling opportunity.

One last follow-up question in terms of the market. Can you give us a general sense of how big you think this market is and how penetrated it is, in terms of backing into that 20, 25 percent organic growth that you're talking about?

I don't have probably an accurate view of the number of stores that I could share with you right now. I think some of the guys who run that business for us would have a better view of it. But we do know that the largest lender has around 2000 storefronts or so, and we are currently at around 470. We also know and believe that this is a highly fragmented market that has an opportunity for consolidation. And so we believe that we have room to grow at that 20 to 25 percent rate as far as the eye can see.

Okay, great. Thank you.

(OPERATOR INSTRUCTIONS) It appears nobody else has signaled for a question. Mr. Putnam, I will turn it back over to you for any closing or ending remarks.

Thanks to everyone for joining us today and thank you for your interest in CompuCredit. Goodbye.

That does conclude today's conference call. We thank you very much for your participation and have a good day.