Atlanticus Holdings Corp (ATLC) 2005 Q2 法說會逐字稿

Good day and welcome to the CompuCredit Corporation's second quarter 2005 earnings 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.

Thank you. Good morning and thank you for joining us for CompuCredit Corporation's second 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, including all statements of our plans, beliefs, or expectations of future results or developments, including our plans and expectations with regard to our originated portfolio credit, our charged-off paper and stored-value card operations, our acquisitions of portfolios, assets or complementary businesses from third parties, the performance of our originated or acquired portfolios, including net interest margin, net charge-off, credit acquisition plans and expectations for our micro loan operations and our auditing and financing segments, and general economic conditions. You should read the forward-looking information section and the risk factor section of our report on form 10-K for the year ended December 31st 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may also access our Web site in order to obtain a hard copy of the press release or financial statement or to listen to an archived version of this conference call.

At this time, I'd like to turn the call over to Mr. David Hanna, Chairman and CEO of CompuCredit, for his remarks.

Thanks, Jay, and thank you all for joining the call this morning. Today I'll review our performance for the second quarter, a record quarter for us, and I'll provide an update on each of our businesses. J. Paul Whitehead, our CFO., will discuss the financial metrics for the quarter in greater detail. After our prepared remarks, we'll be glad to answer any questions that you may have.

We're very pleased to report earnings for the second quarter of $66.5 million, or $1.29 per share. This represents the highest quarterly earnings that we have ever reported. Needless to say, we are very happy with these results and the momentum we've generated year-to-date. In review of the quarter, the net interest margin was 22.7% in the second quarter of 2005 as compared to 20.8% during the first quarter of this year. The adjusted charge-off rate was 8% for the second quarter as compared to 6.9% in the first quarter. Credit quality remains strong as the 60-day-plus delinquency rate was 8.5% at June 30th 2005, compared to 8.7% at March 31st 2005, and 9.6% at June 30th 2004.

Moving on to the review of our current businesses, I'll start with our largest segment, our credit card business. Our originated and purchased portfolios continue to perform at or above our expectations. While we are seeing some competition for our upper tier near-prime accounts, we continue to see good results in our growth of these accounts. We also are very pleased with the growth of our lower-tier sub prime accounts. We added a total of 268,000 new accounts in the second quarter of 2005. Based on the account growth and response rates that we have experienced with our recent marketing efforts, we plan to spend $14 million more on credit card segment marketing during the second half of this year than originally planned. This heightened marketing spend should yield even greater account growth during the third and fourth quarters of this year.

Although we did not purchase any credit card portfolios this quarter, we believe that consolidation activity within the credit card industry may provide future opportunities for us to acquire additional non-prime credit card portfolios. With our experience in acquiring and converting different portfolios for our servicing on multiple platforms, we believe that we are well positioned to deploy some of our cash to make further credit card portfolio acquisitions. Coupled with the strength of our credit card business, the $143 million transaction we completed with Encore Capital Group was a significant contributor to our record earnings results this quarter. Our earnings reflect a pre-tax gain of approximately $70 million, and our sale to Encore of several significant pools of previously charged-off receivables that were owned by our Jefferson Capital subsidiary.

We formed Jefferson Capital in 2003 to purchase and collect previously charged-off credit card receivables. Since then, there have been a large number of new entrants into the debt buying sector, and we have seen prices for charge-off paper rise to a point where it made sense for us to sell most of our existing portfolios and lock in what we feel is attractive, long-term pricing for the charge-offs that we'll continue to generate as part of our ongoing credit card operations. Over the next five years, and pursuant to the piece of the Encore transaction that represents a forward flow arrangement, we have agreed to sell $3.25 billion in charge-offs to Encore at fixed pricing that we believe will be attractive over the entire five-year length of the forward-flow contract.

In addition to the fixed pricing that we will be receiving for each dollar of charge-offs sold to Encore, pursuant to the forward-flow arrangement, $67 million of the $143 million up-front cash payment that we've received from Encore represents a pre-payment for Encore's rights under the forward-flow contract.

Our transaction with Encore also allows us to focus on a couple of high-growth, debt-buying niches where we feel that Jefferson Capital has more of a competitive advantage, those being Chapter 13 bankruptcies and our balance transfer program. We have spent the last few years studying and building best practices to process Chapter 13 defaulted credit card paper, and we should see an increase in these Chapter 13 bankruptcies with the impending bankruptcy law change due to take effect this fall. Jefferson Capital's balance transfer program allows card holders of previously defaulted accounts to receive a new line of credit to allow them the opportunity to repair and restore their credit scores. As part of the Encore transaction, Encore will provide to us significant volumes of both Chapter 13 bankruptcies and accounts eligible for our balance transfer program.

Jefferson Capital remains an important piece of our diversification strategy, and we look forward to its continued contribution to CompuCredit's success.

Now let me turn to our first report on our new auto finance business, formed through our April 1st acquisition from Wells Fargo. We were very pleased with the contribution of this business during the past quarter, and we look forward to the growth potential of this business in the near- and long-term future. We are also excited about the cross-selling opportunities that this new business should be able to provide to us. By way of example, we began experimenting during this past quarter with providing auto loans out of our micro loan storefronts, as well as accepting payments from our auto finance customers within our micro loan storefronts. Making our micro loan storefronts widely available for customers to make their auto loan payments should increase foot traffic within our retail storefronts and allow us to introduce these customers to new credit products and services.

Our micro loan storefronts saw quarter-over-quarter pre-tax earnings growth that was in line with our expectations. Like other micro loan companies, in the four states in which we service loans on behalf of an FDIC-chartered bank, rather than extending the loans ourselves, we've been focused recently on implementing new FDIC regulatory requirements, which limit the number of months that the bank's customers can have certain micro loans outstanding.

Currently, we are in the process of implementing new servicing capabilities for an alternative installment loan product that the bank is offering to its affected customers. We also are rolling out servicing capabilities for alternative credit card products that are being offered to the bank's micro loan customers. While it's too early to determine the exact effects of the new FDIC regulations on our business, it is worth noting that the new regulations represent an acceleration of what we believe to be a competitive strength that we have relative to the mono line micro loan companies, that being our experience with a variety of alternative products that we can market to the bank's customers through our micro loan storefronts.

It is also worth noting that the servicing revenues that we derive from servicing the bank's micro loans represent less than 28% of the gross revenues from our retail micro loan activity. A percentage that -- has been declining and is expected to decline further as we focus on expanding our own microlending operations in states where we believe we can do so at profits meeting our internal profitability hurdles.

Finally, we continue to look to expand our microlending operations in new states where we see opportunities, including Louisiana, Nevada, Texas and Virginia.

Finally, I want to touch on our other business segment, which includes our stored-value card, our merchant credit products, and our Internet microlending initiative. We continue to make investments in each of these areas, and we are optimistic that each of these products can be a real catalyst for growth over the next several years. Our stored value card, offered through our purpose solutions subsidiary, opens our marketing channels up to unbanked consumers, thereby giving them a cost-effective option to carrying cash as a daily payment mechanism.

Although we very much value the marketing presence and cross-selling opportunities that are available to us through our micro loan storefronts, we are very intrigued by the growth potential that we believe we can derive through our offering of merchant credit and Internet micro loan products without having to incur the bricks and mortar hard costs of a storefront ourselves. We believe that partnering with grocery and convenience stores who can increase their own sales by offering point-of-sale merchant credit products should allow us to expand our micro loan activities in an efficient and low-cost manner.

Also, with the low-cost structure behind our Internet-based microlending rollout, we can expand our microlending activities to consumers and areas that would otherwise be cost-prohibitive through a retail storefront based on our profitability hurdles.

Before I turn it over to J. Paul, I would like to highlight our favorable cash position, which was enhanced not only by the $143 million of cash that we received from Encore, but also by a $250 million convertible notes offering we completed during the second quarter. Those of you who follow us know that we have had success in the past in deploying capital at high returns. Based on this history of success, and our belief that we can continue to find high return investment opportunities in the future, we capitalized on the opportunity to obtain a new funding source through the convertible debt markets at a very attractive 3.625% coupon. Our convertible notes offering allowed us to increase our cash reserves for future acquisitions and for working capital purposes, as well as buy back $100 million of our stock with the goal of hedging against potentially higher costs of our equity capital, should the notes be converted into equity in the future.

We continue to pursue a path at CompuCredit that we believe will build long-term value for the company and our shareholders, all the while providing support and value for underserved and unbanked consumers. Our record second quarter, on top of our strong first quarter, has put us on track for the biggest earnings year in our company's history. We believe that we are laying the ground work to continue this success for the rest of 2005 and beyond.

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

Thank you, David. To recap our first quarter results, we reported yesterday record quarterly earnings of $66.5 million, or $1.29 per share. At the end of the second quarter, our book value per share rose to $14.40, up from $14.25 at March 31st of this year. Our return on equity also grew during the quarter from 27.9% during the first quarter to 37.5% during the second quarter. Our liquidity position is stronger than at any time in our history. In addition to the $205 million of unrestricted cash on our balance sheet at June 30th, our collateral base within our originated portfolio master trust supports our access to over $237 million of immediately available liquidity.

In total, this is over $442 million available to fund our growth and our acquisition and diversification efforts. The strength of our liquidity position arrives from solid cash flows that we're generating from our operating activities, some $131.5 million during the first half of this year, as well as from the $133 million of non-escrowed cash that we received from the Encore transaction in the second quarter and the $141.7 million of net proceeds from our $250 million convertible debt issuance during the second quarter, that amount being net of our $100 million share repurchase and $8.3 million of debt issuance cost.

Focusing now on some of the financial operating and statistical data associated with the receivables that we manage, our average managed receivables increased from approximately $2.3 billion in our first quarter to $2.4 billion in our second quarter. These amounts reflect only our economic interests in the receivables and exclude our partners' interests in acquired portfolios. Notwithstanding liquidations of previously purchased portfolios, we expect to see further net growth in our average managed receivables levels, which 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. We were also quite pleased to see net growth in principal receivables within our originated portfolio master trust at the end of the first quarter for the first time in the past few years.

Recapping again the key first quarter managed loan statistics that David mentioned. We experienced a 22.7% net interest margin versus 20.8% in the first quarter, an adjusted charge-off rate of 8% versus 6.9% in the first quarter, and a 60-plus day delinquency rate as of June 30th, versus 8.7% as of March 31st, and 9.6% as of June 30th last year. Not only are our June 30 delinquencies lower than last year's, but our net interest margin is 250 basis points higher than in the second quarter of last year and our adjusted charge-off rate is 80 basis points lower than in last year's second quarter. The trends in these ratios are consistent with favorable credit quality now being experienced by CompuCredit and the credit card industry as a whole.

Our second quarter 2005 net interest margin benefited from lower finance charge and late fee charge-off levels within newly added accounts underlying our originated portfolio master trust. In addition, the rise in net interest margin demonstrates the favorable effects of lower finance charge and late fee charge-offs overall, which is consistent with the improvements that we're seeing year-over-year and the credit quality of all of our portfolios. Although our adjusted charge-off and net charge-off ratios increased from the first quarter of 2005 to the second quarter, the increase is attributable to the three credit card portfolio acquisitions that occurred late in the fourth quarter of 2004 and early in the first quarter of 2005. First quarter managed receivables data excluded all receivables associated with accounts that were at or near charge-off at the time the receivables portfolios were acquired. Now these portfolios have had a chance to season through the delinquency buckets, and we're realizing charge-offs for these portfolios for the first time.

The other income ratio includes the effects of the Jefferson Capital transaction with Encore and was up to 27.3% versus 13.9% in the first quarter. Even without the effects of that transaction, this ratio would have increased from the effects of increased fee income, net of fee charge-offs associated with our largely fee-based credit card product offering to consumers at the lower end of the FICA scoring range. This is apparent through the financial operating and statistical data that we provide for our credit card segment on a stand-alone basis within our second quarter filing on Form 10-Q.

Overall, we're very pleased with the financial operating and statistical data experienced with respect to our managed receivables during the second quarter. While this data include the effects of certain transactions unique to this year's second quarter, we see nothing in this data to suggest any material differences between how this data will play out in the third quarter of this year relative to consensus self-side analyst expectations that were in place immediately prior to our earnings release last night.

Now turning to our GAAP financial statements, I want to begin by noting that the $69.6 million of pre-tax gains that our subsidiary Jefferson Capital recognized on its portfolio sales to Encore this quarter. This pre-tax gain is reflected within fees and other income on non-securitized earnings assets on our income statement. Looking forward to the future accounting implications of our transaction with Encore, $67 million of the $143 million in proceeds represents a pre-payment towards Encore's rights under a five-year forward flow contract to purchase, for a fixed price per dollar, up to $3.25 billion of previously charged off receivables.

As detailed in our filing on Form 10-Q, we expect to recognize roughly $57 million of the $67 million amount on roughly a pro rata basis as we deliver charged-off paper to Encore over the next five years. $10 million of the $67 million is held in escrow and will be released into earnings when the events giving rise to release of the escrow occur later during the five-year forward-flow contract. In addition to the $67 billion of deferred revenue on the Encore trade that we expect to include in Jefferson Capital's revenues over the next five years, Jefferson Capital's revenues also will reflect the fixed rate per dollar of charged-off paper that Encore pays us throughout the life of the five-year, forward-flow arrangement.

I want to note another item that we reported during the second quarter that probably was not anticipated by those of you who follow our company. Included within interest expense on our income statement is an $11 million payment that we made to the lender who financed our equity interest in the CSG-LLC partnership back in 2002. Under the terms of the original loan agreement, in addition to principal that was re-paid along with interest during the fourth quarter of 2002, the lender was entitled to receive 15% of all future excess cash flows that we received from our investment in CSG. This final $11 million payment that we negotiated with the lender entitles us to receive 100% of all future excess cash flows attributable to our investment in CSG. We anticipate that CSG will resume distribution to its members, including us, during the fourth quarter of this year.

I also want to mention that our marketing expense increased to approximately $20 million in the second quarter compared to $18 million in the first quarter and $9 million in the second quarter of 2004. Our marketing spending is higher than we initially planned early in 2005, and as David noted, principally reflects our optimism regarding account growth opportunities within our credit card segment. We now expect full-year 2005 marketing expense to be approximately $90 million.

We discussed, in yesterday's Form 10-Q filing all of the components of GAAP income, including the significant contribution of our lower-tier credit card product to our earnings, the ongoing contribution of the Fingerhut desecuritized receivables to our earnings, the relative contributions of our originated and purchase portfolios to our income from obtained interest, and a segment data and receivables levels for each of our five business segments. I encourage you to review that filing for more details on what we believe has been a terrific quarter for CompuCredit and our shareholders.

Let me conclude by thanking everyone on behalf of both David and me for participating in our second quarter earnings call. We will now opening things up for any questions that you may have.

(Operator Instructions). We go first to Moshe Orenbuch with Credit Suisse First Boston.

Thanks. A couple of questions. I guess, first on Jefferson Capital, any sense of the pricing that they're going to get from those sales, the forward-flow sales? In other words, that $67 million is essentially all the premium that they're paying you to get this transaction set up? Or is a portion of the price going to be reflected in that $67 million I guess is my question?

Well, the $67 million is essentially an upfront payment for the right to buy over the next five years, and in addition to that, we'll be receiving fixed pricing per dollar of charge-off that we really haven't disclosed publicly at this point in time.

But is it reasonable for us to assume that that fixed pricing would be consistent with market pricing today? Or is that not a reasonable assumption?

It is a pricing level that we feel like is attractive sales price looking out over a five-year period.

Five-year period, yes.

Okay. Could you talk a little bit about credit quality? The comments, I guess, you've got some seasoning effect that you talked about taking effect in the second quarter. Is there more of that in the second half? But then again, you've also got some pretty good results coming out of the delinquency buckets. Could you kind of put those two together, and maybe discuss that a little more?

Sure. I think that the one thing that I'd say about what to expect as we go forward is that we've had seasoning of the initial acquired receivables through the delinquency buckets, which means that there were a lot of receivables that we attribute no value to that are in late-stage delinquency status. So the other accounts are starting to churn through the buckets right now. So you will experience some - we will experience some effects associated with new purchases on the portfolios that we buy, new cardholder purchases that will become charged off into the future. So you'll see a -- the adjusted charge-off rate rise in the future relative to the net charge-off rate for the fact that we will have post-acquisition cardholder purchases for which we didn't pay a discounted purchase price flowing through our charge-off rates.

But that's got -- that's primarily based on purchase portfolios rather than the original portfolios --

The original portfolios.

We continue to see the credit quality trends in our originated business as coming in better than we would have expected three months ago, six months ago, nine months ago.

That's good. And then, last thing, you had --

Just also to add, there will be seasonal effects that you have historically seen in the fourth quarter. I just want to make sure that everybody's aware of that.

Okay. Last thing, you talked a little bit about opportunities in the credit card industry. It sounded to me a little more definitively, perhaps, than three months ago. I mean, is there something going on as -- I mean, there's been a fair amount of M&A in the credit card industry. Is that -- I mean, are you looking at some of those transactions, or looking to buy pieces out of those portfolios?

Our belief is that when there is a fair amount of M&A activity that potentially creates opportunity for us.

Some of it during your conference calls in fact.

So we're hopeful that we're able to get involved in some of those transactions that are going on, and we are -- certainly based on our history of success at buying portfolios, we're certainly aggressively pursuing a variety of portfolios out there.

Great. Thanks very much.

(Operator Instructions). There are no further questions at this time. That would conclude today's conference call. Thank you for your participation. You may now disconnect.