Atlanticus Holdings Corp (ATLC) 2005 Q1 法說會逐字稿

Good day, everyone, and welcome to the CompuCredit Corporation's first quarter 2005 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 first quarter 2005 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, capital-raising plans, 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, 2004, 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may also access our website in order to obtain a hard copy of the press release or financial statements or to listen to an archived version of this conference call. With that said, 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 this morning. Today I will review our performance during the first quarter, and I will provide some additional commentary on our business.

J. Paul Whitehead, our CFO, 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 are very pleased to report earnings for the first quarter of $49.2 million, or $0.94 per share. This represents a quarter-over-quarter net income increase of approximately 82% and an increase of 178% over last year's first quarter performance.

Obviously, we are extremely happy with these results and the state of our business. The net interest margin was 20.8% for the first quarter of 2005 as compared to 20.2% during the fourth quarter of 2004. The adjusted charge-off rate was down to 6.9% for the first quarter compared to 8.4% in last year's fourth quarter.

Our credit quality continues to improve as well. At March 31, 2005, the 60-plus day delinquency rate was 8.7% as compared to 10.4% at December 31, 2004. As most of you are aware, we have been pursuing a diversification strategy for some time now, in an attempt to build a stronger and lower-risk company. Also, our diversification allows us to deploy a full array of financial services in support of underserved and un-banked consumers. I want to touch on each of our different businesses including our new auto lending business as we completed our deal with Wells Fargo on April 1st.

In our largest business segment, credit cards, we have continued to have success in marketing both our sub-prime and near-prime products in the first quarter of 2005 adding a combined 256,000 accounts. We remain steadfast in our belief that the current economic climate is favorable for originating new growth, and we plan to continue to devote funding to marketing programs for our originated cards throughout 2005.

We purchased two credit card portfolios during the first quarter, and we have been pleased with the performance of those transactions. The first acquisitions were for approximately $72 million face amount of credit card receivables in which we hold about a 75% equity interest. In the second acquisition, we partnered with an affiliate of Merrill Lynch and another partner to obtain $376 million in face amount of Bank First Corp's credit card receivables. We hold a 47.5% interest in this joint venture. For separate servicing compensation, we service 100% of each of these portfolios.

We remain focused on pursuing sound economic investments and will continue to evaluate additional credit card receivable acquisition opportunities as they become available to us.

Turning now to our Jefferson Capital debt-buying business, this segment had another strong quarter for us with over $7 million in pretax income, and we continue to be pleased with our returns in this area. We believe Jefferson Capital has built a competitive advantage through combining its proprietary strategies with our management team's longstanding credit and collections expertise.

Our retail micro-lending operation continues to expand as we purchased another micro lender in January with 39 stores in the state of Ohio. We are currently at 516 stores and growing. Our first quarter results for this segment reflect industry-wide seasonality for the business, wherein many customers use tax refunds to pay off micro loans and otherwise meet their cash needs. As we look forward to the rest of the year, we expect to see growth in our retail micro-lending operations relative to their contributions in 2004. We also see this year as one of opportunity for us to distinguish our business model from that of the many mono line micro lenders. We believe we are better positioned than the rest of this industry through our capabilities to either offer or service alternative credit products for the rollover micro-lending customers of FDIC chartered banks.

The other business segment consists mainly of our purpose solutions, stored value card, and merchant credit products as well as our Internet micro-lending initiatives. We have continued to test and invest in these innovative products with favorable results. More than ever, we believe that they will be a successful part of our long-term diversification strategy and that we will get some good earnings boost from these businesses, over time.

Finally, we completed our purchase of Wells Fargo Financial's consumer auto receivables business unit on April 1st, and we are now in the auto lending business. In addition to providing us with $130 million in receivables, this acquisition provides a great management team and platform for us to get into the auto lending arena, and we believe we can grow this business by 50% per year for the next few years, not to mention all of the cross-selling opportunities we believe we can generate.

In summary, I am very pleased with where we are with each of our businesses, and I am extremely excited about our company's future. Our first quarter results have given us a tremendous start to 2005, and we look forward to continuing our momentum for the rest of the year.

I will now turn it over to J. Paul for his review of our financial performance during the quarter.

Thank you, David. To recap our first quarter results, we reported earnings of $49.2 million, or $0.94 per share yesterday. This was the second-highest GAAP earnings quarter in our history.

At the end of the first quarter, our book value per share stood at $14.25, up from $13.24 at December 31st of last year. Our equity-to-managed-loans ratio also grew during the first quarter from 31.2% at the close of last year's fourth quarter to 32.3% at the close of the first quarter.

Our liquidity position remained solid, as we had approximately $78.6 million in unrestricted cash as of March 31, 2005. This balance was a little bit higher than at recent quarter-ends, given draws that we made in anticipation of our April 1st completion of the Wells Fargo auto deal. We also have the ability to draw an additional $118 million today against our securitization facilities based on the collateral base within our originated portfolio master trust.

Notwithstanding the strength of our overall liquidity picture, we've been evaluating high yields in convertible debt market transactions and other potential capital sources. Based on the pace and magnitude of recent acquisitions, coupled with our desire to complete further acquisitions, you can expect us to raise additional capital, possibly in the near future, if we find the market is attractive enough to allow us to obtain access to long-term committed funding at reasonable cost.

Turning now to the financial, operating, and statistical data associated with the receivables that we manage, our average managed receivables increased from $2.1 billion in last year's fourth quarter to $2.3 billion in our first quarter. Notwithstanding liquidations of previous purchased portfolios, our originated account growth and the acquisitions that David earlier mentioned caused net growth in our average managed receivables levels during the first quarter.

Throughout the balance of this year, we likewise expect to see further net growth in our average managed receivables levels. Our average managed receivables are comprised of receivables underlying our credit card securitizations as well as loan and fee receivables that are included within non-securitized earnings assets on our balance sheet.

I should also note that these receivables reflect only our economic interest in the receivables and exclude our partners' interest in the acquired portfolios.

Recapping again the key first quarter managed loan statistics that David mentioned, we experienced a 20.8% net interest margin versus 20.2% in last year's fourth quarter, an adjusted charge-off rate of 6.9% versus 8.4% in last year's fourth quarter, and a 60-plus-day delinquency rate of 8.7% as of March 31st versus 10.4% as of December 31st. I should also mention that we saw improvements in each of these statistics relative to the first quarter 2004 results.

For example, our March 31, 2005, 60-plus-day delinquency rates are down 180 basis points relative to March 31, 2004 levels. This improvement is consistent with credit quality improvements we are seeing in our portfolios and is also favorably influenced by the denominator effect of our recent acquisitions, as I'll discuss in a moment.

Our net interest margin improvements reflect significant finance charge and late-free charge-off reductions based, in part, on the broad overall improvements that we are seeing in credit quality and performance on our receivables.

Our first quarter 2005 statistics also benefits from the fact that a piece of our purchase price discounts on recently acquired portfolios nets against finance charge and late-fee charge-offs associated with accounts that were severely delinquent in the hands of portfolio sellers at the time of our acquisitions. Because of the ongoing benefits of credit quality improvements and our accretion of the accretable yield portion of our acquisition discounts in the net interest margin, we expect our net interest margin for the remainder of this year to be even higher than we reported during the first quarter of this year.

The 150 basis-point reduction in our adjusted charge-off rate for the first quarter of last year is, in part, attributable to strides we'd made in our underwriting and collection efforts as aided by favorable economic conditions. Our charge-off rate also benefited from the effects of the three acquisitions that occurred late in fourth quarter of last year and early in the first quarter of this year. That is to say that our March 31st managed receivables data exclude all receivables associated with accounts that were at or near charge-off at the time the receivables portfolios were acquired. The exclusion of these severely delinquent accounts at the time of acquisition means that there are no charge-offs on the acquired portfolio receivables until the portfolio season through the delinquency buckets in the months following the acquisitions.

Magnifying this beneficial effect is the fact that while initially there are no charge-offs, the denominator of the various charge-off ratio computations is increased to include all of the acquired portfolios receivables that were not at or near charge-off at the time of acquisition. In the past, we sometimes refer to this effect as the denominator effect. These beneficial effects will abate in future 2005 quarters as to the acquired portfolios season through the delinquency buckets.

Turning to GAAP income -- our first quarter net income attributable to common shareholders increased $21 million, or 82% from the first quarter of last year and is up 178% over our earnings for the first quarter of 2004. The largest item of note is the year-over-year increase of approximately $70 million in fees and other income on non-securitized earning assets. Several items contributed to this increase, including growth in our largely fee-based credit card offering to consumers at the lower end of the FICO scoring range, the addition of our retail micro-lending and servicing segment that came online in June of 2004, income from the collection of our zero basis Fingerhut receivables which were de-securitized in the third quarter of last year, and income growth within our Jefferson capital investment and previously charged-off receivables segment.

While the level of income that we realize each quarter on the de-securitized Fingerhut receivables will gradually decline over the next year or so as we liquidate that portfolio, we expect to see continued growth in the remainder of our businesses throughout 2005.

Marketing expense increased significantly year-over-year reflecting our optimism in our credit card originations. At this point, we expect to consistently spend on marketing for the remainder of this year at around the level we spent in the first quarter. We will increase or decrease spending, however, depending upon what we're seeing in the marketplace.

We discuss all the components of GAAP income and much more in our 10-Q filing that we released yesterday, and I encourage you all to review that filing.

Lastly, while the fact that we securitized many of our receivables and off-balance sheet transactions has historically caused volatility in our GAAP earnings, we believe that 2005 should be a little more stable for us than in past years from a GAAP earnings perspective. As such, we recently decided to give guidance on our GAAP earnings expectations at over $3 per share for 2005. Moreover, for those of you who evaluate us based on our managed receivables, we note that we hold the same expectation with respect to the performance of those receivables.

With that, I'd like to conclude by saying thank you to everybody who joined us today on the call. I will now turn the call over to the operator and open the floor up for any questions that you may have.

[OPERATOR INSTRUCTIONS] Sameer Gokhale with Bear Stearns.

Hi, good morning, and congratulations on the strong quarter. I had a few questions. The first question, I guess, would be on your expectations for loan growth. If I heard you correctly, you said in coming quarters you expect to see your loan portfolio grow, and I'm assuming that was primarily in the card business. When I look at your current quarter, and if I try to back out the acquisitions that you had, it seems to me that there was a decline in the portfolio, and I know part of it is probably seasonal. But I just wanted to get some clarity. Like, in the next quarter, when you look at the overall portfolio, do you see them growing next quarter as well, or is that more like a Q3, Q4 event?

Well, there's a couple of factors, one of which I mentioned, and I don't know if you factor this into your calculations, Sameer. The purchase portfolios that we've done in the past continue to liquidate down, and that's being offset by growth in our originated portfolios.

Essentially, we do expect to see, as I said, net growth in our average managed receivables levels throughout the year. We've had contractions, I guess, in the past few quarters, but we expect to see balances that will continue to grow relative to where we've been in the first quarter.

The magnitude of the increase is probably not going to be in the order of hundreds of billions, but millions of dollars of increase relative to what we've had in this quarter.

And, Sameer, your point about the seasonality of the first quarter is also on target.

Okay, that's great. And then the other question I had was it seems like the portfolio is showing very good credit performance, and I know you'd mentioned some of the reasons why some of the acquisitions are having a beneficial impact on some of your credit metrics. But in dollar terms, also, if you look at the net charge-offs in your card portfolio seem to be declining in absolute dollars. So if I were to think of your charge-off rate and your charge-off dollars for the whole year, I mean, where do you see this ratio somewhat stabilizing and what do you see happening to dollar charge-offs for the rest of the year? And I'm talking about net charge-offs, not the adjusted charge-offs.

I guess we were at about $54 million of net charge-offs, I guess, during the first quarter of this year and we don't see a huge change relative to those levels. There will be, based on seasonality, I guess, the fourth quarter would be higher than that, and we would probably show each quarter being maybe a little bit higher than that, based on growth that we've experienced, but we don't really see a whole lot of movement in any particular direction, certainly not a big increase, and it's been a good quarter reflecting the receivables we also had in the acquisitions that we've just done.

So is it fair to think of it as your acquired portfolio season, that puts some upward pressure on the charge-off rate, but because you are seeing such an improvement in the delinquency rate, that is more than offsetting any seasoning effect, so if your acquired portfolios, and that's on a net basis, you see the charge-off rate coming down, going forward.

I think that's a fair way to look at it.

The lower delinquency rates that you see in the first quarter have traditionally translated into real strong third quarter results because you've got less accounts in the late-stage delinquency buckets, or delinquency buckets going to roll out in the third quarter in charge-offs.

Okay, and then I had a question about the payday lending business. There seems to be a lot of changes in this space, but if you look at -- I think there is something that's been proposed in the state of Texas. There's a bill that's going to be voted on in the House there, and that potentially could have a beneficial impact, if I'm thinking of it correctly, on the payday lending landscape in Texas. But then, on the other hand, in the state if Illinois, there was some legislation passed recently, which seemed to be more cumbersome for payday lenders.

So from your vantage point, I think you are targeting more expansion in Texas. Could you talk a little bit more about what your sense of that legislative landscape is in that state?

Well, Sameer, as you know, there are over 30 states that have a state-enabling legislation for the type of micro-lending products we do in our store fronts, and each of those states we have a team that monitors and is involved with each of those states in what's going on and trying to make sure that legislation that comes out is as favorable as possible to the business that we're in.

We do believe Texas is going to be a good state for us. We are pretty optimistic that the law there is going to be one that we can operate under and feel good about the prospects. So we do think that's going to be a good area for us.

But, more importantly, I think, for the overall -- all the states, including states where banks are used in partnership with us, we believe that because of the pretty vast array of products and services that we have to offer to that marketplace, that we can grow in most all of the regulatory environments that we'll find ourselves in based on the fact that we'll have a lot of different products and services to offer to that customer base. So in each state, like I say, we monitor, and we're involved in what's going on but, overall, we feel pretty good about the direction of the regulatory environment for all those businesses.

So on that point, are you currently cross-selling products to your payday lending customers? Can you give us a sense for whether you originated any card accounts through your payday lending stores and how that might compare to, say, a couple of quarters ago?

I think I mentioned this in our last call -- we have been testing a variety of different things. We continue to do that. We intend to, by mid-this year, be rolling out a much broader-scale level of products to the storefronts.

[OPERATOR INSTRUCTIONS] Moshe Orenbuch, CS First Boston.

Thanks, actually a couple of different questions. Given your comments about the denominator effect, is it just fair to just take the amount of acquired assets and just exclude them and assume that most of the rest of the improvement related to the originated portfolio?

Yes, clearly, there has been a market improvement in our originated portfolio and our other previously purchased portfolio.

I think the performance in every portfolio line has been -- we've seen improvement in all our portfolios, Moshe.

What I thought was interesting is in the 10-Q there was some disclosure on the characteristics and the pricing of the portfolios you purchased in 2004 versus the first quarter of 2005, and it looked like the discounts were roughly comparable, but in 2005 a smaller piece of it actually had to go for credit. Is that something specific to the portfolio you acquired or is there actually a trend that -- it sounded like pricing -- maybe I'm drawing the wrong conclusion, but it sounded like pricing was improving on those portfolios?

I guess probably the level of discounting that you're seeing being applied to -- are you referring to the excluded accounts, Moshe?

The total discount was sort of comparable in the 20% area, but the amount that you actually had to apply, either for excluded accounts and, therefore, how much was left over for accreted yield was actually larger in the ones that were acquired.

On a relative basis?

Yes.

Yes, but I think it's reflected of the environment that we're seeing, and when we do an acquisition, we project out, you know, basically not with respect to what the seller did with receivables, but what we think we can do from a collections perspective with respect to the receivables employing the same collection strategy that we use with all of our other accounts. So it is reflective of the broad, across-the-board improvements that you're seeing in credit quality. There's no doubt that will be a larger percentage of our discounts that's reflected in accretable yield.

And as far as the comments about raising long-term money -- was that primarily for acquisitions or was that also for financing of the portfolios and maybe if you could just talk about that a little bit?

I think we would look at that more in terms of capital for additional acquisition opportunities.

And as you look at the developments in the payday market, does that lead you to think there's going to be more consolidation there?

I think the pricing in that area is probably more favorable for acquisition opportunities than it was six months ago or nine months ago. So while we don't have anything that we're -- large acquisitions in that space right now, we think there's some potential there.

[OPERATOR INSTRUCTIONS] Gentlemen, it appears we have no further questions. That does conclude our question-and-answer session for today and also today's conference. We would like to thank you all for your participation, and we hope that you have a great day, thank you.