Atlanticus Holdings Corp (ATLC) 2004 Q4 法說會逐字稿

Good day and welcome to the CompuCredit Corporation fourth-quarter 2004 earnings 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. Jay Putnam. Please go ahead, sir.

Good morning and thank you for joining us for CompuCredit Corporation's fourth-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, charged-off paper 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, growth and acquisition plans and expectations for our micro lending operations, and general economic conditions.

You should read the forward-looking information section 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 materially 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may also access our website in order to obtain a hard copy of the press release or financial statements or to listen to an archived version of this conference call. At this time, I will now turn it over to Mr. David Hanna, Chairman and CEO of CompuCredit, for his remarks.

Thanks, Jay, and thank you all for joining us. Today we will review our performance for the fourth quarter of 2004. I will also provide an update on the current state of our various businesses and share some thoughts about our outlook. J. Paul Whitehead, our Chief Financial Officer, will discuss financial metrics for the quarter in greater detail. After our prepared remarks, we will be glad to answer any questions that you have.

Yesterday, we reported earnings for the fourth quarter of $27 million or 54 cents per share. We continue to be pleased with the underlying economic performance of our business, as we finished the year with earnings of $96.3 million or $1.93 per share. For the fourth quarter of 2004, our net interest margin was 20.2 percent, compared to 22.1 for the fourth quarter of 2003. In addition, the adjusted net charge-off rate was 8.4 percent for the fourth quarter, compared to 7.8 percent for the fourth quarter of 2003.

As many of you recall, these ratios for the fourth quarter of 2003 were favorably influenced by our second Providian portfolio purchase in the third quarter of 2003.

Over the last year, we have made a conscious effort to use our favorable liquidity position to grow and diversify our business while staying focused on the financial needs of our customer base in the underserved market. I wanted to touch on the different facets of our operations and provide some color on each of our businesses, starting with our credit card business.

We have experienced performance that has met or exceeded our expectations for our traditional credit card offerings to underserved near-prime consumers, and we have been especially pleased with our results in the marketing lower-tier credit card offerings.

In the fourth quarter of 2004, we originated approximately 167,000 new credit card accounts. We will continue to consistently deploy cash during 2005 to market our card offerings where we see opportunity. Based on our recent results, we are fairly bullish on our credit card originations for 2005.

Turning to purchased credit card portfolios, we have acquired three credit card portfolios since close of our third quarter last year. First, we partnered with Bank of America and Greenwich Capital to purchase from Fleet Bank approximately $1.1 billion in face amount of Circuit City credit card receivables in November. We have a one-third equity stake in this portfolio, but we service the entire portfolio and are paid a servicing fee to do so.

We also purchased two portfolios in January of this year. Partnering with an affiliate of Merrill Lynch and another partner, we purchased $370 million in face amount of Bank First Corp credit card receivables in connection with its sale to the Marshall Bancorp Group. We hold a 47.5 percent equity interest in this portfolio. Once again, we service the entire portfolio for a fee.

Finally, we purchased a portfolio of $80 million in face amount of credit card receivables in late January, also in partnership with a Merrill Lynch affiliate. Our equity interest in this portfolio approximates 75 percent.

Purchasing and servicing credit card receivables has become a real competitive edge for us and we continue to look for portfolios to acquire, both here in the U.S. and globally. In relation to our purchased portfolios, I also wanted to highlight the part of our business that purchases and collects charged-off receivables, our Jefferson Capital subsidiary. In terms of cost recovery revenue, we grew this business by 50 percent year-over-year from 37.8 million in 2003 to 56.7 million for 2004, and we have been pleased by this performance.

As some of you may recall, we added Jefferson Capital to our operations in 2003 as part of our diversification efforts, as a way to leverage some of our excess collections capacity and to take advantage of what we consider to be favorable market pricing for buyers of defaulted credit card receivables. Based on the pricing that we saw in the market at the time, we felt that we could derive better economics from collecting charged-off paper out of the securitization trusts that we serviced than could be derived by selling this charged-off paper to other debt buyers.

More recently, the favorable market conditions for buyers of charge-off paper has softened a bit, given the entry of new growth-oriented, publicly held debt buyers into the market. Nevertheless, we continue to believe that Jefferson Capital is an attractive business for us based on its expertise, its performance, and some of the niches that it has developed.

Additionally, while we have sold certain portfolios of receivables from the trusts that we service to outside bidders who have been willing to pay prices at or above Jefferson Capital's bid price, we continue to see market pricing at levels at which it typically makes sense for Jefferson Capital to either make or participate in purchases from the trusts that we service.

Jefferson Capital also made several purchases during 2004 from other third party sellers of charged-off credit card receivables. We believe that our collection experience, credit experience, as well as our technology edge clearly give us a competitive advantage over the other bad debt buyers in the market.

We also saw an opportunity in November 2004 to participate in another large bulk purchase of previously charged-off credit card receivables through our one-third investment interest in a pool of previously charged-off Circuit City credit card receivables. Along with Bank of America and Greenwich Capital, we entered into this venture to acquire from Fleet Bank just over $350 million at face amount of previously charged-off credit card receivables.

Moving away from credit cards, I would like to review some of our other ventures. We are very pleased with the contribution that our microlending business is making to our consolidated operating results. As you can see from the business segment data included with our earnings release last night, we saw a $6 million contribution to pretax earnings from the retail side of this business during the seven months following our first acquisition in this space in June of last year.

Right now, we are up to over 500 microlending storefronts nationwide with the addition of a 39 store chain we acquired in early January of this year. We continue to evaluate individual store performance and look to grow profits from this segment from 2004 levels as we integrate our three previous acquisitions, look for further acquisition opportunities, and both add new stores and streamline the performance of our existing stores.

We also will be doing some testing throughout 2005, wherein we intend to cross market our stored value cards and other products and services to our customers through our retail storefronts. Our philosophy at CompuCredit has always been to test ideas extensively with the customer base to determine the products and price points that the customer really wants. We are employing this same type of strategy with our microlending operations and we are confident that it will enable us to grow rapidly in this sector.

We believe that our microlending business is a very good business in its own right, but we also envision a scenario under which we may be able to market a broad array of our credit card, stored value card, and other products directly to our underserved and unbanked consumers through our microlending retail outlets.

As you look at our business segment data, you will also notice that we have invested significantly within our other business segment during 2004. Activities within this segment include our purpose solutions stored value cards and merchant credit products, as well as an online microlending initiative. Each of the businesses within our other business segment is more or less in a startup mode, but we are optimistic that we can see meaningful growth and profitability from these businesses in the future.

We continue to aggressively sign up merchants to offer our stored value cards and point-of-sale loans to consumers, and we believe consumers see good value in these purpose solutions product offerings. Through our merchant credit product, for example, we are giving consumers a cost-effective alternative at the cash register to costly bank and merchant NSF, or overdraft charges. We are hopeful that 2005 will be a breakout year for the products and services developed within this other business segment.

Finally, we reached an agreement in December to purchase Wells Fargo Financials' consumer auto receivables business unit. This unit has $133 million in assets and operates in 40 states. This acquisition will provide us with an opportunity to add automobile lending to our suite of services offerings. Moreover, it will provide a solid platform and team that will help us achieve long-term growth and success in this large and fragmented industry. We think we are on target to close on this deal during April of 2005.

In conclusion, we are very pleased with our economic performance this year and feel we are well positioned for 2005 and beyond. We measure our success in 2004 not only based on the earnings that we achieved, but also on what we were able give back to the community through our over $9 million of charitable contributions that we made during the fourth quarter of 2004.

We saw our 2004 CompuCredit Corporation Charitable Designation Program as a way of allowing our shareholders to choose charities that could benefit from some of CompuCredit's financial success. We were most pleased to see one of our major shareholders, Corsair II Capital Partners, designate the Save the Children Asian Earthquake Tsunami Relief Fund and the American Red Cross International Response Fund as beneficiaries of an aggregate $1 million of our charitable gifts.

We look forward to continuing our evolution from a credit card company to a provider of a full suite of financial products and services to the underserved and unbanked consumer markets. Now I would like to turn it over to J. Paul for his review.

Thanks, David. First, let me review some of our key financial operating and statistical data and then discuss some details underlying our financial performance. To recap our results for the fourth quarter, we posted GAAP net income for our common shareholders of $27 million, which represents earnings of 54 cents per share on a fully diluted basis.

After the effects of our fourth-quarter activities, our book value per share now stands at $13.24, up from $12.64 at September 30. Our equity to managed loans ratio dropped to 31.2 percent at the close of the fourth quarter, down from 32.8 percent at the close of the second quarter. Our liquidity position remains very solid, as we generated over $118 million in cash from our operating activities during 2004. Additionally, our variable funding facility from Merrill Lynch continues to provide us with ample leverage to grow the receivables within our originated portfolio master trust.

Through our existing securitization facilities, along with our originated portfolio collateral base as it stands today, we have the ability to draw over $190 million to meet our liquidity needs as they arise during the first quarter of 2005 and beyond.

Focusing now on some of the financial, operating, and statistical data underlying the receivables that we manage, we begin with the fact that we managed approximately $2.1 billion in average managed receivables during the fourth quarter of 2004, up from 1.9 billion in the third quarter. These receivables are comprised of receivables underlying our credit card securitizations, as well as loan and fee receivables which are included within the non-securitized earning assets category on our balance sheet.

As one evaluates the economic performance of our managed receivables, it is important to realize that the $2.1 billion in average managed receivables reflects only our economic interest in the receivables. This amount excludes our partners' separate economic or minority interest in our acquired portfolios.

In comparing some of our key managed receivables statistics between the fourth quarter of 2004 and the fourth quarter of 2003, we note that the net interest margin was 20.2 percent in the fourth quarter of 2004 as compared to 22.1 percent during the fourth quarter of 2003. This decrease was based on the fact that 2003's fourth quarter net interest margin included the full benefit of a second Providian acquisition that we closed toward the end of 2003's third quarter.

We also saw our net interest margin fall 1 percent during the fourth quarter of 2004 as compared to the third quarter of 2004 due to the expected seasonal effects of higher finance charge charge-offs. The adjusted charge-off rate was 8.4 percent in the fourth quarter of 2004, as compared to 8.3 percent for the third quarter. The adjusted charge-off rate was 7.8 percent during the fourth quarter of 2003.

The increase in the adjusted charge-off rate between 2003 and 2004 is caused by the maturing of some of our purchased portfolios, in which a higher percentage of charge-offs are now attributable to undiscounted post-acquisition cardholder purchases. The fact that our adjusted charge-off rate remained relatively flat between the third and fourth quarters of 2004 reflects higher fourth-quarter recoveries, which served to offset otherwise higher seasonal charge-offs during the fourth quarter. Overall, we experienced economic performance for our managed receivables during the fourth quarter that was in line with our expectations.

We expect that our three recent portfolio acquisitions will favorably impact debt (ph) interest margin and the adjusted charge-off rate for the first quarter of this year.

While we have a lot of moving parts associated with the various acquisitions that we have closed and their effects on our managed financial operating and statistical data, we currently expect this data will show first-quarter performance in the range of analysts' expectations as published prior to our earnings release last night.

Given the groundwork that we are laying in the first quarter of this year, we also feel very good about our potential to significantly exceed the full 2005 year published expectations of the analysts who follow our Company.

On the expense side of things, our margin expenses increased significantly during the fourth quarter of 2004 as we began to more aggressively invest in growing our originated portfolios. In addition, our $9 million charitable contributions that David earlier mentioned accounts for much of our operating ratio increase in the fourth quarter of 2004. This contribution reduced our fourth-quarter earnings by 11 cents per share.

Moving on to GAAP earnings. With all of the growth and diversification we have experienced, you'll notice from our earnings release that we have broken out our income statement into four segments to provide for greater transparency. David previously gave some color on each of these segments. They include our credit card segment, our investment and previously charged-off receivables segment, principally represented by our Jefferson Capital subsidiary, our retail microlending and servicing segment, and an other segment. Our other segment is primarily comprised of our stored value card operations and our point-of-sale merchant credit and online microlending operations.

Beginning in the second quarter of this year, we expect to classify our pending auto lending business as a fifth reporting business segment.

We expect to file our 10-K for 2004 within the next few weeks, and there will be a lot of detail within our 10-K on each of our business segments and on differences between our 2004 and 2003 GAAP results. As you'll recall, one of the reasons why I provide financial operating and statistical data associated with the managed receivables underlying our GAAP financial statements is to give investors of our performance in managing our receivables, a view that is not clouded by the volatility in GAAP earnings that is caused by securitization accounting. Securitization accounting has had significant effects on the comparability of our operating results from quarter to quarter and year-over-year between 2003 and 2004.

Our Fingerhut portfolio is a significant example of the volatility reflected within our GAAP results. We experienced significant securitization gain associated with this portfolio in the third quarter of 2003 that did not repeat itself in the third quarter of 2004. Furthermore, with the desecuritization of the Fingerhut portfolio receivables during the third quarter of 2004, we took the Fingerhut receivables back onto our books at the zero basis that we had in our Fingerhut retained interest. This transaction favorably affected our fourth quarter 2004 results relative to our fourth quarter 2003 results.

Aside from the effects of the Fingerhut desecuritization on the comparability of our fourth-quarter results between 2003 and 2004, the biggest drivers of our higher fourth-quarter 2004 GAAP earnings are fees generated by our credit card offerings and our microlending and servicing operations.

Finally, in a favorable financing development late in the year, we converted all of our Series A and Series B preferred stock into approximately 5.2 million shares of common stock. This conversion eliminates the dilutive effects of future paid in-kind dividends on the preferred stock, as well as the potential for quarterly cash dividends of approximately $1.2 million on the preferred stock that otherwise would have become effective during 2005.

For additional details underlying each of the many factors affecting our reported GAAP earnings, I would invite you all to review our 2004 10-K filing once it is released within the next few weeks. As I do each quarter, I would like to reinforce that we are focused on the identification and pursuit of economically sound long-term investments, not an investment that will necessarily produced attractive short-term GAAP earnings results.

We continue to believe that there are attractive opportunities for meaningful and for profitable organic growth at CompuCredit and for acquisitions of portfolios and businesses that complement our existing platforms for servicing the needs of underserved and unbanked consumers. We feel very good about the amount of capital that we put to work during the fourth quarter and at the beginning of 2005 in connection with our acquisitions, as well as about our potential to put more of our liquidity work to work to further organic growth and acquisition activities throughout the remainder of 2005.

Let me conclude now by thanking you all, on behalf of both David and me, for your interest in CompuCredit and your participation in our fourth-quarter earnings call. With that, we would be happy to address any questions that you may have.

(OPERATOR INSTRUCTIONS) Sameer Gokhale with Bear Stearns.

Good morning. I just had a question on a couple of the metrics that you briefly mentioned in your comments. But the other income on an economic basis seemed to have declined in dollar terms compared to last quarter. Was that primarily reflective of, excluding the latest card acquisitions in Q4, was there a decline in the core portfolio excluding those acquisitions that contributed to the decline in other income? Am I thinking of that correctly?

There was not a decline during the fourth quarter of any kind of a meaningful amount of the originated portfolio. That was the second part of your question, Sameer.

Right. I'm basically -- if I'm looking at this, if I'm calculating this correctly, your other income on an economic basis decreased to 69 million from about 77 million. And I was just wondering why there was a decline, because I would have thought that in Q4 there should be seasonally higher interchange income, perhaps some sort of other types of fees, like over-limit fees in the (indiscernible) proprietary business, so just curious why there was a decline.

This probably explains it, Sameer. We classify -- it will explain some of it -- we classify our charge-offs of our fees as a component of our other income ratio. Specifically, whereas in the past -- and we announced this change last year when we filed our 10-K -- we had included our fee charge-offs in the past as an offset on our net interest margin. We reclassified the fee charge-offs as a component of the other income ratio. And, as I explained before, the net interest margin was also down in the fourth quarter due to the seasonally higher charge-offs. The same phenomenon affects your fee income in the fourth quarter relative to the third quarter.

Okay. So the late fees go against the net interest margin. All the other types of fees, charge-offs of those go against other income?

Absolutely. You got it.

The other thing I was curious about -- and I think you had some sort of explanation of this in your prior 10-Qs, but just some clarification would be helpful. Your dollar amount of adjusted charge-offs increased, but the unadjusted charge-offs appeared to have decreased, and I was curious -- shouldn't the two be moving in the same direction?

(multiple speakers) the dollar amount of the adjusted charge-offs seems to have increased compared to last quarter, but if you just look at your net charge-off rate, that is not the adjusted charge-off rate, but just the net charge-off rate, and you try to compute the dollar amount of net charge-offs, they seem to have decreased slightly compared to last quarter.

I was trying to address that in the prepared comments also. The phenomenon that you have is that as our portfolios mature, a greater percentage of our portfolios is now comprised of dollars that we have put out at face amount for cardholder purchases. Whereas immediately after a portfolio acquisition, we, in our adjusted charge-off rate, do not recognize a charge-off if we did not pay for the face amount of what was charged off. So that is what you're seeing in the adjusted chart-off rate increase.

Okay. And then the other question I had was more strategic in nature. I think, based on your comments, it sounded like the plan is to invest quite a bit of capital in the microlending business, specifically, I believe the payday lending business. So I was curious about whether you had strategically considered potential implications of Wal-Mart entering the payday lending business. I think they have begun offering check cashing and wire transfer services at some of there locations. And I think they are applying for a bank charter. They have been turned down for that.

But it seems like if they decide to get into the payday lending business, they have a massive retail footprint and they have lower-income customers coming in to shop anyway at their stores. So it would seem like that would be a competitive threat. Have you considered potentially talking to Wal-Mart or approaching them about setting up storefronts within Wal-Mart stores or do you see that as a nonissue? Just some thoughts would be helpful.

Clearly, Sameer, I think that we, along with everybody in the banking world that has a lot of retail presence, is concerned about Wal-Mart's presence in retail banking in a big way. I think that is why you have had a lot of the larger retail checking account banks and things like that fight the Wal-Mart banking applications that have come forward.

I think it is our expectation that at some point Wal-Mart is going to have a bank charter and is going to look to do a lot of banking activities through their storefronts. We believe that our customer base -- that there is always going to be a customer base out there that is available in the microlending space. The opportunity to do something with Wal-Mart is something that we would certainly entertain and would make a lot of sense for them, in that they could ramp up growth a lot quicker with a partner that already had a lot of stores. But clearly, like I say, that is an area that is going to be a concern for us or really any other retail financial product deliverer out there.

It just seems like they do not necessarily need a bank charter to get into the payday lending business, right? They could partner with a bank or they could just go it alone. Am I thinking of that correctly?

Or they could partner with us.

Okay, that's helpful. My last question was, I was just curious -- I don't know if you had mentioned this. But the funding of your auto lending business, this purchase that you made, how much of that was funded with debt versus equity? I don't seem to recall whether you disclosed that.

We actually haven't closed the transaction yet. We anticipate, I think David mentioned early in April '05, is the closing date. And at that time, we will talk through the financing versus the equity contribution that we are making in that acquisition.

Okay, thank you very much.

(OPERATOR INSTRUCTIONS) Moshe Orenbuch with Credit Suisse First Boston.

thanks. Good morning. Just wondering if you could talk a little bit about the two segments that you broke out besides the other segment -- in other words, the Jefferson Capital and microlending -- because they both had, I guess, some acquisition activity late in the fourth quarter or beginning of the first. Should we think about that as adding to their earnings contribution or does that get reinvested? How should we think about what they were able to generate in 2004 and how we should think about those contributions going forward?

I think that is our expectation that both of those will add to their earnings power in 2005 and beyond. The real issue, though, in both of those sectors is as we see opportunities to grow with microlending, if that is organic, we are going to be reinvesting some amount organically, and also may see other acquisition opportunities in that area. And the same goes with Jefferson Capital. It is a business where you have to have discipline to buy when the pricing is such that it is favorable, and you have to have discipline to sit on the sidelines when the pricing is not favorable. So for both the acquisitions last year, I think we are looking for some good earnings momentum out of both those in 2005.

And then just specifically with respect to Jefferson Capital, you had been talking as recently as I think three months ago that you did not really see a lot of opportunities out there. So was it a specific opportunity that related to your relationship with Bank of America that brought this up? How did that come about?

That was in part of it was the B of A relationship. But there was also the sizing of it and the flexibility that we brought to the transaction helped a lot in that.

One other maybe general question. Could you talk about your capital position now and maybe prioritize the uses as you get to 2005?

I think that, as you all now, we've got a pretty good hurdle rate for capital that we are going to invest. And right now in our originated credit card business, we're seeing very attractive returns on the capital that we are investing in that. So we are clearly looking to grow that business during 2005, but we also continue to see portfolios that are attractive. We continue to see areas within the microlending that we can get the kind of returns that we are looking for.

So there is not necessarily a 1-2-3-4. We've got four different lines of business and as we go month-by-month, that is really what we're looking at is, right now, with this opportunity, is this the highest return? And that is one of the things that we as a management team spend a fair amount of time on, is evaluating one opportunity off of the other to make sure that we are investing in the ones that look the most attractive.

Last thing is do you seen new entrants into the portfolio buying business? Not the Jefferson Capital -- your purchase of distressed portfolios.

I think there are -- anytime that people see a public company that has had a lot of success in an area and made a lot of profit, I think it invites some competition. We have not seen any new players out there in things that we have bid on. We have seen the same types of competitors that we have seen for some time. But I think that some of them might get more aggressive in a transaction or so. Like I say, just looking at some of our results, I think people might take a chance on a portfolio or what have you, but we have not seen really new entrants.

Great. Thanks a lot.

(OPERATOR INSTRUCTIONS) And Mr. Putnam, there appears to be no further questions at this time, and this does conclude today's conference call. At this time, you may disconnect.