UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2001
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission file number: 001-12351
METRIS COMPANIES INC.
(Exact name of registrant as specified in its charter)
Delaware 41-1849591
(State of Incorporation) (I.R.S. Employer Identification No.)
10900 Wayzata Boulevard, Minnetonka, Minnesota 55305-1534
(Address of principal executive offices)
(952) 525-5020
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _____
-----
As of April 30, 2001, 63,007,205 shares of the registrant's common stock, par
value $.01 per share, were outstanding.
METRIS COMPANIES INC.
FORM 10-Q
TABLE OF CONTENTS
-----------------
March 31, 2001
PART I. FINANCIAL INFORMATION Page
Item 1. Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets.............................3
Consolidated Statements of Income.......................4
Consolidated Statements of Changes in
Stockholders' Equity.................................5
Consolidated Statements of Cash Flows...................6
Notes to Consolidated Financial Statements..............7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................................18
Item 3. Quantitative and Qualitative Disclosures
About Market Risk...................................29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................30
Item 2. Changes in Securities........................................30
Item 3. Defaults Upon Senior Securities..............................30
Item 4. Submission of Matters to a Vote of Security Holders..........30
Item 5. Other Information............................................30
Item 6. Exhibits and Reports on Form 8-K.............................31
Signatures...................................................32
Part I. Financial Information
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except per-share data) (Unaudited)
March 31, December 31,
2001 2000
------------ ------------
Assets:
Cash and due from banks ................................................... $ 72,801 $ 84,938
Federal funds sold ........................................................ 328,353 367,937
Short-term investments .................................................... 87,855 68,565
----------- -----------
Cash and cash equivalents ................................................. 489,009 521,440
----------- -----------
Retained interests in loans securitized ................................... 1,910,168 2,023,681
Less: Allowance for loan losses .......................................... 643,261 640,852
----------- -----------
Net retained interests in loans securitized ............................... 1,266,907 1,382,829
----------- -----------
Credit card loans (net of allowance for loan
losses of $143,537 and $123,123, respectively).......................... 1,259,271 1,056,080
Property and equipment, net ............................................... 128,154 128,395
Deferred income taxes ..................................................... 150,339 146,345
Purchased portfolio premium ............................................... 87,709 95,537
Other receivables due from credit card
securitizations, net ................................................... 160,503 186,694
Other assets .............................................................. 222,569 218,705
----------- -----------
Total assets ......................................................... $ 3,764,461 $ 3,736,025
=========== ===========
Liabilities:
Deposits .................................................................. $ 2,074,389 $ 2,106,199
Debt ...................................................................... 356,200 356,066
Accounts payable .......................................................... 90,589 83,473
Deferred income ........................................................... 212,379 235,507
Accrued expenses and other liabilities .................................... 101,926 71,227
----------- -----------
Total liabilities .................................................... 2,835,483 2,852,472
----------- -----------
Stockholders' Equity:
Convertible preferred stock - Series C, par
value $.01 per share; 10,000,000 shares authorized,
989,343 and 967,573 shares issued and outstanding, respectively....... 368,530 360,421
Common stock, par value $.01 per share;
100,000,000 shares authorized, 62,905,421 and 62,242,787 shares issued
and outstanding, respectively 629 622
Paid-in capital ........................................................... 207,106 198,077
Unearned compensation ..................................................... (4,241) --
Retained earnings ......................................................... 356,954 324,433
----------- -----------
Total stockholders' equity ........................................... 928,978 883,553
----------- -----------
Total liabilities and stockholders' equity ........................... $ 3,764,461 $ 3,736,025
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Dollars in thousands, except per-share data) (Unaudited)
Three Months Ended
March 31,
2001 2000
---- ----
Interest Income:
Credit card loans and retained interests in loans securitized $ 163,522 $ 95,359
Federal funds sold .......................................... 2,311 1,369
Other ....................................................... 3,896 1,073
--------- ---------
Total interest income ....................................... 169,729 97,801
Deposit interest expense .................................... 36,623 13,742
Other interest expense ...................................... 11,212 10,366
--------- ---------
Total interest expense ...................................... 47,835 24,108
--------- ---------
Net Interest Income ......................................... 121,894 73,693
Provision for loan losses ................................... 87,729 87,793
--------- ---------
Net Interest Income (Loss) After Provision for Loan Losses .. 34,165 (14,100)
--------- ---------
Other Operating Income:
Net securitization and credit card servicing income ......... 87,092 131,059
Credit card fees, interchange and other credit card income .. 62,832 50,797
Enhancement services revenues ............................... 78,264 59,616
--------- ---------
228,188 241,472
--------- ---------
Other Operating Expense:
Credit card account and other product solicitation and
marketing expenses ...................................... 40,765 32,142
Employee compensation ....................................... 54,736 43,772
Data processing services and communications ................. 22,379 20,625
Warranty and debt waiver underwriting and claims
servicing expense........................................ 6,679 6,732
Credit card fraud losses .................................... 2,651 2,141
Purchased portfolio premium amortization .................... 7,828 4,967
Other ....................................................... 36,185 29,744
--------- ---------
171,223 140,123
--------- ---------
Income Before Income Taxes and Cumulative Effect of
Accounting Changes...................................... 91,130 87,249
Income taxes ................................................ 35,085 33,853
--------- ---------
Income Before Cumulative Effect of Accounting Changes ....... 56,045 53,396
Cumulative effect of accounting changes (net of income taxes
of $9,000 and $2,180)................................... 14,499 3,438
--------- ---------
Net Income .................................................. 41,546 49,958
Convertible preferred stock dividends-Series C .............. 8,403 7,598
--------- ---------
Net Income Applicable To Common Stockholders ................ $ 33,143 $ 42,360
========= =========
Earnings per share:
Basic-income before cumulative effect of accounting
changes ............................................. $ 0.76 $ 0.79
Basic-cumulative effect of accounting changes .......... (0.23) (0.06)
Basic-net income ....................................... 0.53 0.73
Diluted-income before cumulative effect of accounting
changes ............................................. 0.57 0.59
Diluted-cumulative effect of accounting changes ........ (0.15) (0.04)
Diluted-net income ..................................... 0.42 0.55
Shares used to compute earnings per share:
Basic ....................................................... 62,303 57,963
Diluted ..................................................... 98,445 90,658
See accompanying Notes to Consolidated Financial Statements.
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
(In thousands) (Unaudited)
Total
Number of Shares Preferred Common Paid-in Unearned Retained Stockholders'
Preferred Common Stock Stock Capital Compensation Earnings Equity
------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 885 57,919 $ 329,729 $ 386 $ 130,772 $ -- $ 162,914 $ 623,801
Net income ............. -- -- -- -- -- -- 49,958 49,958
Cash dividends ......... -- -- -- -- -- -- (566) (566)
Preferred dividends in
kind - Series C .... 20 -- 7,419 -- -- -- (7,419) --
Issuance of common stock
under employee
benefit plans ...... -- 78 -- 1 1,543 -- -- 1,544
--------- --------- --------- --------- --------- --------- --------- ---------
BALANCE AT MARCH 31, 2000 ... 905 57,997 $ 337,148 $ 387 $ 132,315 $ -- $ 204,887 $ 674,737
========= ========= ========= ========= ========= ========= ========= =========
BALANCE AT DECEMBER 31, 2000 968 62,243 $ 360,421 $ 622 $ 198,077 $ -- $ 324,433 $ 883,553
Net income ............. -- -- -- -- -- -- 41,546 41,546
Cash dividends ......... -- -- -- -- -- -- (916) (916)
Preferred dividends in
kind - Series C .... 21 -- 8,109 -- -- -- (8,109) --
Issuance of common stock
under employee
benefit plans ...... -- 662 -- 7 9,029 (4,241) -- 4,795
--------- --------- --------- --------- --------- --------- --------- ---------
BALANCE AT MARCH 31, 2001 ... 989 62,905 $ 368,530 $ 629 $ 207,106 $ (4,241) $ 356,954 $ 928,978
========= ========= ========= ========= ========= ========= ========= =========
See accompanying Notes to Consolidated Financial Statements.
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands) (Unaudited)
Three Months Ended
March 31,
2001 2000
---- ----
Operating Activities:
Net income ................................................ $ 41,546 $ 49,958
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of accounting changes .............. 14,499 3,438
Depreciation and amortization ........................ 19,019 17,720
Change in allowance for loan losses .................. 22,823 26,061
Change in value of derivative instruments ............ 3,710 --
Changes in operating assets and liabilities, net:
Deferred income taxes ............................ (3,994) 1,778
Other receivables due from credit card
securitizations, net ........................ 5,010 48,342
Accounts payable and accrued expenses ............ (7,364) 24,613
Deferred income .................................. (23,128) 16,937
Other ............................................ 37,257 (20,439)
--------- ---------
Net cash provided by operating activities ................. 109,378 168,408
--------- ---------
Investing Activities:
Net proceeds from sales and repayments of securitized loans 100,059 (282,031)
Net loans originated ...................................... (210,151) (90,344)
Additions to premises and equipment ....................... (2,866) (15,308)
--------- ---------
Net cash used in investing activities ..................... (112,958) (387,683)
--------- ---------
Financing Activities:
Net increase in debt ...................................... 134 222
Net (decrease) increase in deposits ....................... (31,810) 232,961
Cash dividends paid ....................................... (916) (566)
Increase in common equity ................................. 3,741 1,544
--------- ---------
Net cash (used in) provided by financing activities ....... (28,851) 234,161
--------- ---------
Net (decrease) increase in cash and cash equivalents ...... (32,431) 14,886
Cash and cash equivalents at beginning of period .......... 521,440 194,433
--------- ---------
Cash and cash equivalents at end of period ................ $ 489,009 $ 209,319
========= =========
Supplemental disclosures and cash flow information:
Cash paid during the period for:
Interest ............................................. $ 42,090 $ 21,936
Income taxes ......................................... (7,831) 8,302
Tax benefit from employee stock option exercises .......... 743 166
See accompanying Notes to Consolidated Financial Statements.
METRIS COMPANIES INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except as noted) (Unaudited)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Metris
Companies Inc. ("MCI") and its subsidiaries, including Direct Merchants Credit
Card Bank, N.A. ("Direct Merchants Bank"), which may be referred to as "we,"
"us," "our" and the "Company." The Company is an information-based direct
marketer of consumer credit products and enhancement services primarily to
moderate-income consumers.
All significant intercompany balances and transactions have been
eliminated in consolidation. Certain prior-year amounts have been reclassified
to conform with the current year's presentation.
Interim Financial Statements
We have prepared the unaudited interim consolidated financial
statements and related unaudited financial information in the footnotes in
accordance with accounting principles generally accepted in the United States of
America and the rules and regulations of the Securities and Exchange Commission
("SEC") for interim financial statements. These interim financial statements
reflect all adjustments consisting of normal recurring accruals which, in the
opinion of management, are necessary to present fairly our consolidated
financial position and the results of our operations and our cash flows for the
interim periods. You should read these consolidated financial statements in
conjunction with the financial statements and the notes thereto contained in our
annual report on Form 10-K for the fiscal year ended December 31, 2000. The
nature of our business is such that the results of any interim period may not be
indicative of the results to be expected for the entire year.
Pervasiveness of Estimates
We have prepared the consolidated financial statements in accordance
with accounting principles generally accepted in the United States of America,
which require us to make estimates and assumptions that affect the reported
amount of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements as well as the
reported amount of revenues and expenses during the reporting periods. Actual
results could differ from these estimates.
NOTE 2 - EARNINGS PER SHARE
The following table presents the computation of basic and diluted
weighted average shares used in the per-share calculations:
Three Months Ended
March 31,
2001 2000
---- ----
(In thousands)
Income before cumulative effect of accounting changes $56,045 $53,396
Preferred dividends - Series C ...................... 8,403 7,598
------- -------
Net income applicable to common stockholders
before cumulative effect of accounting changes . 47,642 45,798
Cumulative effect of accounting changes, net ........ 14,499 3,438
------- -------
Net income applicable to common stockholders ........ $33,143 $42,360
======= =======
Weighted-average common shares outstanding .......... 62,303 57,963
Adjustments for dilutive securities:
Assumed exercise of outstanding stock options ....... 1,785 3,532
Assumed conversion of convertible preferred stock ... 34,357 29,163
------- -------
Diluted common shares ............................... 98,445 90,658
======= =======
NOTE 3 - ACCOUNTING CHANGES
During the quarter ended March 31, 2001 we adopted Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments. SFAS 133 requires enterprises to recognize
all derivatives as either assets or liabilities in the statement of financial
position and to measure those instruments at fair market value. These statements
are effective for all quarters of fiscal years beginning after June 15, 2000. As
a result of the adoption of SFAS 133 effective January 1, 2001 the Company has
marked its derivatives to their market value and recognized a one-time,
non-cash, after-tax charge to earnings of $14.5 million. This one-time charge is
reflected as a "Cumulative effect of accounting change" in the consolidated
statements of income for the three months ended March 31, 2001.
We use derivatives to assist us in achieving our strategy of balanced
asset and liability interest rate exposure. Our principal market risk is due to
changes in interest rates. Our primary managed assets are credit card loans,
which are virtually all priced at rates indexed to the variable Prime Rate. We
fund credit card loans through a combination of cash flows from operations,
asset securitizations, bank loans, subsidiary bank deposits, long-term debt and
equity issuances. The majority of this funding is indexed to variable rate
LIBOR. We seek to minimize the impact of changes in interest rates primarily by
matching asset and liability repricings. We enter into interest rate cap, floor
and swap agreements to hedge the cash flow, fair value and earnings impact of
fluctuating market interest rates on the spread between the floating rate loans
and the floating and fixed rate debt issued to fund the loans.
In connection with the issuance of term asset-backed securities by the
trust, we enter into term interest rate cap agreements with highly rated bank
counterparties to effectively cap the potentially negative impact to us from
increases in the floating interest rate of the securities. These agreements are
for original terms ranging from two to ten years and are scheduled to terminate
between February 2002 and January 2010. The contracted strike rate on the
interest rate caps were above the current market interest rates at December 31,
2000 and March 31, 2001. Therefore, these caps are considered ineffective in
hedging the interest rate movements. SFAS 133 required us to reduce the carrying
value of these caps to their current market values. The reduction related to the
adoption of SFAS 133 effective January 1, 2001 was recorded as a one-time,
non-cash, after-tax charge to earnings of $14.7 million. This one-time charge is
included in the "Cumulative effect of accounting change" in the consolidated
statements of income for the three months ended March 31, 2001. The adjustment
to reduce the carrying value of the caps for the quarter ended March 31, 2001
was recorded as a non-cash, pre-tax charge of $3.7 million to "Net
securitization and credit card servicing income" in the consolidated statements
of income for the three months ended March 31, 2001.
We also enter into interest rate swap agreements to hedge a portion of
our fixed rate deposits. The interest rate swaps are designated as fair value
hedges under SFAS 133. At adoption, the change in the fair value of the swaps
exceeded the change in fair value of the fixed rate deposits. This difference of
$0.2 million was recorded as a one-time, non-cash, after-tax benefit to
earnings. This one-time benefit is included in the "Cumulative effect of
accounting change" in the consolidated statements of income for the three months
ended March 31, 2001. The interest rate swaps were substantially effective in
offsetting changes in the fair value of the hedged CD portfolio during the
quarter ended March 31, 2001. These interest rate swap agreements are for
original terms ranging from one to two years and are scheduled to terminate
between April 2002 and January 2003.
During the quarter ended March 31, 2000, we adopted Staff Accounting
Bulletin ("SAB") No. 101 "Revenue Recognition in Financial Statements," for our
debt waiver products. This SAB formalized the accounting for services sold where
the right to a full refund exists, requiring all companies to defer recognition
of revenues until the cancellation period is complete. Previously, we recognized
half of the revenues in the month billed and half in the following month. We now
recognize all of the revenue the month following completion of the cancellation
period. This change resulted in a one-time, non-cash net charge to earnings of
$3.4 million, which is reflected as a "Cumulative effect of accounting change"
in the consolidated statements of income for the three months ended March 31,
2000. Because we have applied the provisions of this SAB to our membership
programs since 1998, before the SEC formalized its guidance, no adjustment was
required for our membership services revenues.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is as follows:
Three Months Ended
March 31,
2001 2000
---- ----
Balance at beginning of period $ 763,975 $ 619,028
Provision for loan losses 87,729 87,793
Provision for loan losses (1) 180,063 116,677
Loans charged off (272,081) (193,490)
Recoveries 27,112 15,081
------------- --------------
Net loans charged off (244,969) (178,409)
-------------- --------------
Balance at end of period $ 786,798 $ 645,089
============= ==============
(1) Amounts are included in "Net securitization and credit card servicing
income."
NOTE 5 - SEGMENTS
We operate in two principal areas: consumer lending products and
enhancement services. Our consumer lending products are primarily unsecured and
secured credit cards, including the Direct Merchants Bank MasterCard(R) and
Visa(R). Our credit card accountholders include customers obtained from
third-party lists and other customers for whom general credit bureau information
is available.
We market our enhancement services, including (i) debt waiver
protection for unemployment, disability, and death; (ii) membership programs
such as card registration, purchase protection and other club memberships; and
(iii) third-party insurance, directly to our credit card customers and customers
of third parties. We currently administer our extended service plans sold
through a third-party retailer, and the customer pays the retailer directly. In
addition, we develop customized targeted mailing lists from information
contained in our databases for use by unaffiliated companies in their own
product solicitation efforts that do not directly compete with our efforts.
We have presented the segment information reported below on a managed
basis. We use this basis to review segment performance and to make operating
decisions. To do so, the income statement and balance sheet are adjusted to
reverse the effects of securitizations. Presentation on a managed basis is not
in conformity with generally accepted accounting principles. The elimination
column in the segment table includes adjustments to present the information on
an owned basis as reported in the financial statements of this quarterly report.
We do not allocate the expenses, assets and liabilities attributable to
corporate functions to the operating segments, such as employee compensation,
data processing services and communications, third-party servicing expenses, and
other expenses including occupancy, depreciation and amortization, professional
fees, and other general and administrative expenses. We include these expenses
in the reconciliation of the income before income taxes and cumulative effect of
accounting changes for the reported segments to the consolidated total. We do
not allocate capital expenditures for leasehold improvements, capitalized
software and furniture and equipment to operating segments. There were no
operating assets located outside of the United States for the periods presented.
Our enhancement services operating segment pays a fee to our consumer
lending products segment for successful marketing efforts to the consumer
lending products segment's cardholders at a rate similar to those paid to our
other third parties. Our enhancement services segment reports interest income
and the consumer credit products segment reports interest expense at our
weighted-average borrowing rate for the excess cash flow generated by the
enhancement services segment and used by the consumer lending products segment
to fund the growth of cardholder balances.
Three Months Ended March 31,
2001
----
Consumer
Lending Enhancement
Products Services Reconciliation (a) Consolidated
-------- ----------- ------------------ ------------
Interest income ................... $ 466,820 $ 3,620 $ (300,711) (b) $ 169,729
Interest expense .................. 143,930 -- (96,095) (b) 47,835
---------- ---------- ------------- ----------
Net interest income ............. 322,890 3,620 (204,616) 121,894
Other revenue ..................... 125,371 78,264 24,553 228,188
Total revenue ..................... 592,191 81,884 (276,158) 397,917
Income before
income taxes and
cumulative effect of
accounting changes 157,580 (c) 54,678 (c) (121,128) (d) 91,130
Total assets ...................... $9,181,949 $ 138,599 $ (5,556,087) (e) $3,764,461
Three Months Ended March 31,
2000
----
Consumer
Lending Enhancement
Products Services Reconciliation(a) Consolidated
-------- ----------- ----------------- ------------
Interest income ................... $ 359,502 $ 2,155 $ (263,856) (b) $ 97,801
Interest expense .................. 114,684 -- (90,576) (b) 24,108
----------- ----------- ----------- ------------
Net interest
income ........................ 244,818 2,155 (173,280) 73,693
Other revenue ..................... 125,253 59,616 56,603 241,472
Total revenue ..................... 484,755 61,771 (207,253) 339,273
Income before
income taxes and
cumulative effect of
accounting changes................ 152,341 (c) 41,877 (c) (106,969) (d) 87,249
Total assets ....................... $ 7,229,730 $ 142,080 $(4,976,237) (e) $ 2,395,573
(a) The reconciliation column includes: intercompany eliminations; amounts not
allocated to segments; and adjustments to the amounts reported on a managed
basis to reflect the effects of securitization.
(b) The reconciliation to consolidated owned interest revenue and interest
expense includes the elimination of $3.6 million and $2.2 million of
intercompany interest received by the enhancement services segment from the
consumer lending products segment for the three months ended March 31, 2001 and
2000, respectively.
(c) Income before income taxes and cumulative effect of accounting changes
includes intercompany commissions paid by the enhancement services segment to
the consumer lending products segment for successful marketing efforts to
consumer lending products cardholders of $3.2 million and $0.3 million for the
three months ended March 31, 2001 and 2000, respectively.
(d) The reconciliation to the owned income before income taxes and cumulative
effect of accounting changes includes: unallocated costs related to employee
compensation; data processing and communications; third-party servicing
expenses; and other expenses. The majority of these expenses, although not
allocated for the internal segment reporting used by management, relate to the
consumer lending products segment.
(e) Total assets include the assets attributable to corporate functions not
allocated to operating segments and the removal of investors interests in
securitized loans to present total assets on an owned basis.
NOTE 6 - DEBT AND DEPOSITS
We have a credit facility that consists of a $170 million revolving
credit facility and a $100 million term loan which mature in July 2003. At March
31, 2001 and December 31, 2000, we had outstanding borrowings of $100 million
under the term loan facility with weighted-average interest rates of 8.6% and
9.9%, respectively. There were no outstanding borrowings under the revolving
credit facility for these periods. At March 31, 2001, we were in compliance with
all financial covenants under the credit facility.
Direct Merchants Bank issues certificates of deposit of $100,000 or
more. As of March 31, 2001 and December 31, 2000, $2.1 billion of CDs were
outstanding with original maturities ranging from six months to five years and
three months to five years, respectively. These CDs pay fixed interest rates
ranging from 4.9% to 7.6% and 5.4% to 7.6%, respectively.
We have various indirect subsidiaries which have not guaranteed the
senior notes or credit facility. The following condensed consolidating financial
statements of the Company, the guarantor subsidiaries and the non-guarantor
subsidiaries are presented for purposes of complying with SEC reporting
requirements. Separate financial statements of the guarantor subsidiaries and
the non-guarantor subsidiaries are not presented because management has
determined that the subsidiaries' financial statements would not be material to
investors.
METRIS COMPANIES INC.
Supplemental Consolidating Balance Sheets
March 31, 2001
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
Assets:
Cash and cash equivalents ................ $ (7,506) $ 7,071 $ 489,444 $ -- $ 489,009
Net retained interests in loans
securitized ........................... (1,176) (4) 1,268,087 -- 1,266,907
Credit card loans ........................ 14,389 -- 1,244,882 -- 1,259,271
Property and equipment, net .............. -- 71,150 57,004 -- 128,154
Deferred income taxes .................... (2,786) 11,316 141,809 -- 150,339
Purchased portfolio premium .............. 248 -- 87,461 -- 87,709
Other receivables due from credit card
securitizations, net................... 27 310 160,166 -- 160,503
Other assets ............................. 13,790 34,110 183,191 (8,522) 222,569
Investment in subsidiaries ............... 1,651,952 1,536,617 -- (3,188,569) --
----------- ----------- ----------- ----------- -----------
Total assets ............................. $ 1,668,938 $ 1,660,570 $ 3,632,044 $(3,197,091) $ 3,764,461
=========== =========== =========== =========== ===========
Liabilities:
Deposits ................................. $ (1,000) $ -- $ 2,075,389 $ -- $ 2,074,389
Debt ..................................... 775,008 (73,170) (345,638) -- 356,200
Accounts payable ......................... 841 9,528 84,481 (4,261) 90,589
Deferred income .......................... 10,454 35,579 170,607 (4,261) 212,379
Accrued expenses and other liabilities.... (45,343) 36,681 110,588 -- 101,926
----------- ----------- ----------- ----------- -----------
Total liabilities ........................ 739,960 8,618 2,095,427 (8,522) 2,835,483
----------- ----------- ----------- ----------- -----------
Total stockholders' equity ............... 928,978 1,651,952 1,536,617 (3,188,569) 928,978
----------- ----------- ----------- ----------- -----------
Total liabilities and
stockholders' equity................... $ 1,668,938 $ 1,660,570 $ 3,632,044 $(3,197,091) $ 3,764,461
=========== =========== =========== =========== ===========
METRIS COMPANIES INC.
Supplemental Consolidating Balance Sheets
December 31, 2000
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
Assets:
Cash and cash equivalents ............... $ 64,869 $ 10,658 $ 445,913 $ -- $ 521,440
Net retained interests in loans
securitized .......................... 311 -- 1,382,518 -- 1,382,829
Credit card loans ....................... 2,232 -- 1,053,848 -- 1,056,080
Property and equipment, net ............. -- 77,693 50,702 -- 128,395
Deferred income taxes ................... (2,415) 17,104 131,656 -- 146,345
Purchased portfolio premium ............. 248 -- 95,289 -- 95,537
Other receivables due from credit card
securitizations, net.................. 14 84 186,596 -- 186,694
Other assets ............................ 13,806 41,946 173,583 (10,630) 218,705
Investment in subsidiaries .............. 1,588,918 1,442,295 -- (3,031,213) --
----------- ----------- ----------- ----------- -----------
Total assets ............................ $ 1,667,983 $ 1,589,780 $ 3,520,105 $(3,041,843) $ 3,736,025
=========== =========== =========== =========== ===========
Liabilities:
Deposits ................................ $ (1,000) $ -- $ 2,107,199 $ -- $ 2,106,199
Debt .................................... 345,024 880 10,162 -- 356,066
Accounts payable ........................ 259 14,536 73,993 (5,315) 83,473
Deferred income ......................... 12,718 49,934 178,170 (5,315) 235,507
Accrued expenses and other liabilities... 427,429 (64,488) (291,714) -- 71,227
----------- ----------- ----------- ----------- -----------
Total liabilities ....................... 784,430 862 2,077,810 (10,630) 2,852,472
----------- ----------- ----------- ----------- -----------
Total stockholders' equity .............. 883,553 1,588,918 1,442,295 (3,031,213) 883,553
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholders'
equity ............................... $ 1,667,983 $ 1,589,780 $ 3,520,105 $(3,041,843) $ 3,736,025
=========== =========== =========== =========== ===========
METRIS COMPANIES INC.
Supplemental Consolidating Statements of Income
Three Months Ended March 31, 2001
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
Net Interest (Expense) Income............ $ (35,551) $ (1,430) $ 158,875 $ -- $ 121,894
Provision for loan losses ............... 204 -- 87,525 -- 87,729
--------- --------- --------- --------- ------------
Net Interest (Expense) Income After
Provision for Loan Losses............. (35,755) (1,430) 71,350 -- 34,165
--------- --------- --------- --------- ------------
Other Operating Income:
Net securitization and credit card
servicing income...................... 2,378 -- 84,714 -- 87,092
Credit card fees, interchange and other
credit card income.................... (1,289) (6,788) 70,909 -- 62,832
Enhancement services revenues............ -- 17,118 61,146 -- 78,264
--------- --------- --------- --------- ------------
1,089 10,330 216,769 -- 228,188
--------- --------- --------- --------- ------------
Other Operating Expense:
Credit card account and other product
solicitation and marketing expenses... -- 6,120 34,645 -- 40,765
Employee compensation ................... -- 43,411 11,325 -- 54,736
Data processing services and
communications ....................... -- (30,533) 52,912 -- 22,379
Warranty and debt waiver underwriting
and claims servicing expense.......... -- 167 6,512 -- 6,679
Credit card fraud losses ................ -- -- 2,651 -- 2,651
Purchased portfolio premium
amortization ........................... -- -- 7,828 -- 7,828
Other ................................... 38 18,462 17,685 -- 36,185
--------- --------- --------- --------- ------------
38 37,627 133,558 -- 171,223
--------- --------- --------- --------- ------------
(Loss) Income Before Income Taxes,
Equity in Income of Subsidiaries
and Cumulative Effect of
Accounting Change..................... (34,704) (28,727) 154,561 -- 91,130
Income taxes ............................ (13,361) (11,970) 60,416 -- 35,085
Equity in income of subsidiaries......... 62,889 79,646 -- (142,535) --
--------- --------- --------- --------- ------------
Income Before Cumulative Effect of
Accounting Change..................... 41,546 62,889 94,145 (142,535) 56,045
Cumulative effect of accounting change,
net .................................. -- -- 14,499 -- 14,499
--------- --------- --------- --------- ------------
Net Income .............................. $ 41,546 $ 62,889 $ 79,646 $(142,535) $ 41,546
========= ========= ========= ========= ===========
METRIS COMPANIES INC.
Supplemental Consolidating Statements of Income
Three Months Ended March 31, 2000
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
Net Interest (Expense) Income............ $ (12,047) $ (571) $ 86,311 $ -- $ 73,693
Provision for loan losses ............... (15) -- 87,808 -- 87,793
--------- --------- --------- --------- ---------
Net Interest Expense After Provision for
Loan Losses .......................... (12,032) (571) (1,497) -- (14,100)
--------- --------- --------- --------- ---------
Other Operating Income:
Net securitization and credit card
servicing income...................... 2,386 (28) 128,701 -- 131,059
Credit card fees, interchange and other
credit card income.................... (1,548) 1,108 51,237 -- 50,797
Enhancement services revenues............ -- 16,334 43,282 -- 59,616
--------- --------- --------- --------- ---------
838 17,414 223,220 -- 241,472
--------- --------- --------- --------- ---------
Other Operating Expense:
Credit card account and other product
solicitation and marketing expenses... -- 7,770 24,372 -- 32,142
Employee compensation ................... -- 34,871 8,901 -- 43,772
Data processing services and
communications ....................... -- (18,744) 39,369 -- 20,625
Warranty and debt waiver underwriting
and claims servicing expense.......... -- 794 5,938 -- 6,732
Credit card fraud losses ................ 2 -- 2,139 -- 2,141
Purchased portfolio premium
amortization.......................... -- -- 4,967 -- 4,967
Other ................................... 37 17,991 11,716 -- 29,744
--------- --------- --------- --------- ---------
39 42,682 97,402 -- 140,123
--------- --------- --------- --------- ---------
(Loss) Income Before Income Taxes,
Equity in Income of Subsidiaries
and Cumulative Effect of
Accounting Change..................... (11,233) (25,839) 124,321 -- 87,249
Income taxes ............................ (4,358) (10,338) 48,549 -- 33,853
Equity in income of subsidiaries......... 56,833 72,334 -- (129,167) --
--------- --------- --------- --------- ---------
Income Before Cumulative Effect of
Accounting Change..................... 49,958 56,833 75,772 (129,167) 53,396
Cumulative effect of accounting
change, net .......................... -- -- 3,438 -- 3,438
--------- --------- --------- --------- ---------
Net Income .............................. $ 49,958 $ 56,833 $ 72,334 $(129,167) $ 49,958
========= ========= ========= ========= =========
METRIS COMPANIES INC.
Supplemental Condensed Consolidating Statements of Cash Flows
Three Months Ended March 31, 2001
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Consolidated
-------------- ------------ ------------ ------------
Operating Activities:
Net cash (used in) provided by operating
activities....................................... $ (25,827) $ (50,515) $ 185,720 $ 109,378
--------- --------- --------- ---------
Investing Activities:
Net proceeds from sales and repayments of
securitized loans ............................... -- -- 100,059 100,059
Net loans originated or collected .................. (11,611) -- (198,540) (210,151)
Additions to premises and equipment ................ -- 4,271 (7,137) (2,866)
--------- --------- --------- ---------
Net cash (used in) provided by
investing activities............................. (11,611) 4,271 (105,618) (112,958)
--------- --------- --------- ---------
Financing Activities:
Net (decrease) increase in debt .................... (37,616) 56,984 (19,234) 134
Net decrease in deposits ........................... -- -- (31,810) (31,810)
Cash dividends paid ................................ (916) -- -- (916)
Net increase (decrease) in equity .................. 3,595 (14,327) 14,473 3,741
--------- --------- --------- ---------
Net cash (used in) provided by
financing activities............................. (34,937) 42,657 (36,571) (28,851)
--------- --------- --------- ---------
Net (decrease) increase in cash and cash
equivalents...................................... (72,375) (3,587) 43,531 (32,431)
Cash and cash equivalents at beginning of
period .......................................... 64,869 10,658 445,913 521,440
--------- --------- --------- ---------
Cash and cash equivalents at end of period ......... $ (7,506) $ 7,071 $ 489,444 $ 489,009
========= ========= ========= =========
METRIS COMPANIES INC.
Supplemental Condensed Consolidating Statements of Cash Flows
Three Months Ended March 31, 2000
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Consolidated
-------------- ------------ ------------ ------------
Operating Activities:
Net cash (used in) provided by operating
activities....................................... $ (29,876) $ (26,573) $ 224,857 $ 168,408
--------- --------- --------- ---------
Investing Activities:
Net proceeds from sales and repayments of
securitized loans ............................... -- -- (282,031) (282,031)
Net loans originated or collected .................. 2,328 -- (92,672) (90,344)
Additions to premises and equipment ................ -- (5,618) (9,690) (15,308)
--------- --------- --------- ---------
Net cash provided by (used in)
investing activities ............................ 2,328 (5,618) (384,393) (387,683)
--------- --------- --------- ---------
Financing Activities:
Net increase (decrease) in debt .................... 74,407 4,189 (78,374) 222
Net increase in deposits ........................... -- -- 232,961 232,961
Cash dividends paid ................................ (566) -- -- (566)
Net (decrease) increase in equity .................. (25,414) 26,956 2 1,544
--------- --------- --------- ---------
Net cash provided by financing activities .......... 48,427 31,145 154,589 234,161
--------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents...................................... 20,879 (1,046) (4,947) 14,886
Cash and cash equivalents at beginning
of period........................................ 43,619 309 150,505 194,433
--------- --------- --------- ---------
Cash and cash equivalents at end of period ......... $ 64,498 $ (737) $ 145,558 $ 209,319
========= ========= ========= =========
ITEM 2.
METRIS COMPANIES INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information management
believes to be relevant to understanding the financial condition and results of
operations of Metris Companies Inc. ("MCI") and its subsidiaries, including
Direct Merchants Credit Card Bank, N.A. ("Direct Merchants Bank"), which may be
referred to as "we," "us," "our" and the "Company." This discussion should be
read in conjunction with the following documents for a full understanding of our
financial condition and results of operations: Management's Discussion and
Analysis of Financial Condition and Results of Operations in our 2000 Annual
Report to Shareholders; our annual report on Form 10-K for the fiscal year ended
December 31, 2000; and our Proxy Statement for the 2001 Annual Meeting of
Shareholders. In addition, this discussion should be read in conjunction with
our quarterly report on Form 10-Q for the period ended March 31, 2001, of which
this commentary is a part, and the condensed consolidated financial statements
and related notes thereto.
Results of Operations
Net income for the three months ended March 31, 2001 was $41.5 million,
down from $50.0 million for the first quarter of 2000. Diluted earnings per
share for the three months ended March 31, 2001 was $0.42 compared to $0.55 per
share for the first quarter of 2000. The decrease in net income is the result of
the cumulative effect of accounting change for the adoption of Statement of
Financial Accounting Standard No. 133, a one-time revenue increase from an
operational change in the first quarter of 2000 and the reduction in other
operating income, partially offset by increases in net interest income
and other operating expenses. The increase in net interest income is largely
attributable to the growth in average managed loans to $9.4 billion for the
first quarter 2001 from $7.4 billion for the first quarter 2000, an increase of
28%.
During the quarter ended March 31, 2001 we adopted Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which establishes accounting and reporting standards
for derivative instruments. SFAS 133 requires enterprises to recognize all
derivatives as either assets or liabilities in the statement of financial
position and to measure those instruments at fair value. Prior to SFAS 133, we
amortized the costs of interest rate contracts on a straight-line basis over the
expected life of the contract. The adoption of SFAS 133 resulted in a one-time,
non-cash, after-tax charge to earnings of $14.5 million reflected as a
"Cumulative effect of accounting change" in the consolidated statements of
income for the three months ended March 31, 2001.
During the quarter ended March 31, 2000 we adopted Staff Accounting
Bulletin No. 101 - "Revenue Recognition in Financial Statements" for our debt
waiver products. This SAB formalized the accounting for services sold where the
right to a full refund exists, requiring all companies to defer recognition of
revenues until the cancellation period is complete. Previously, we recognized
half of the revenues in the month billed and half in the following month. We now
recognize all of the revenue the month following completion of the cancellation
period. This change resulted in a one-time, non-cash net charge to earnings of
$3.4 million, which is reflected as a "Cumulative effect of accounting change"
in the consolidated statements of income for the three months ended March 31,
2000. Because we have applied the provisions of this SAB to our membership
programs since 1998, before the SEC formalized its guidance, no adjustment was
required for our membership services revenues.
Managed Loan Portfolio
We analyze our financial performance on a managed loan portfolio basis.
To do so, we adjust the income statement and balance sheet to reverse the
effects of securitization. Our discussion of revenues, where applicable, and
provision for loan losses includes comparisons to amounts reported in our
consolidated statements of income ("owned basis"), as well as on a managed
basis.
Our managed loan portfolio is comprised of credit card loans, retained
interests in loans securitized and the investors' share of securitized credit
card loans. The investors' share of securitized credit card loans is not an
asset of the Company. Therefore, we do not show it on our consolidated balance
sheets. The following tables summarize our managed loan portfolio:
March 31, December 31, March 31,
2001 2000 2000
---- ---- ----
(Dollars in thousands)
Period-end balances:
Credit card loans:
Credit card loans ........... $1,402,808 $1,179,203 $ 329,023
Retained interests in loans
securitized ............. 1,910,168 2,023,681 1,806,361
Investors' interests in
securitized loans ....... 6,170,416 6,070,224 5,236,282
---------- ---------- ----------
Total managed loan portfolio ... $9,483,392 $9,273,108 $7,371,666
========== ========== ==========
Three Months Ended
March 31,
2001 2000
---- ----
(Dollars in thousands)
Average balances:
Credit card loans:
Credit card loans ......................... $1,298,748 $ 227,251
Retained interests in loans securitized ... 2,044,729 1,731,945
Investors' interests in securitized loans.. 6,050,624 5,393,200
---------- ----------
Total managed loan portfolio ................. $9,394,101 $7,352,396
========== ==========
Impact of Credit Card Securitizations
The following table provides a summary of the effects of credit card
securitizations on selected line items of our statements of income for each of
the periods presented, as well as selected financial information on both an
owned and managed loan portfolio basis:
Three Months Ended
March 31,
2001 2000
---- ----
(Dollars in thousands)
Statements of Income
(owned basis):
Net interest income ................ $ 121,894 $ 73,693
Provision for loan losses .......... 87,729 87,793
Other operating income ............. 228,188 241,472
Other operating expense ............ 171,223 140,123
----------- ------------
Income before income taxes
and cumulative effect of
accounting changes............... $ 91,130 $ 87,249
=========== ============
Adjustments for
Securitizations:
Net interest income ................ $ 204,616 $ 173,280
Provision for loan losses .......... 180,063 116,677
Other operating income ............. (24,553) (56,603)
Other operating expense ............ -- --
----------- ------------
Income before income taxes
and cumulative effect of
accounting changes............... $ -- $ --
=========== ============
Statements of Income
(managed basis):
Net interest income ................ $ 326,510 $ 246,973
Provision for loan losses .......... 267,792 204,470
Other operating income ............. 203,635 184,869
Other operating expense ............ 171,223 140,123
----------- ------------
Income before income taxes and
cumulative effect of
accounting changes............... $ 91,130 $ 87,249
=========== ============
Other Data:
Owned Basis:
Average interest-earning assets ....... $ 3,788,430 $ 2,137,016
Return on average assets (2) .......... 6.0% 9.0%
Return on average total equity (2) .... 25.0% 30.7%
Net interest margin (1) ............... 13.0% 13.9%
Managed Basis:
Average interest-earning assets ....... $ 9,839,055 $ 7,530,216
Return on average assets (2) .......... 2.3% 2.7%
Return on average total equity (2) .... 25.0% 30.7%
Net interest margin (1) ............... 13.5% 13.2%
(1) Net interest margin is equal to annualized net interest income divided by
average interest-earning assets.
(2) Amounts for the three-month period ended March 31, 2001 are shown before the
impact of the adoption of SFAS 133.
Net Interest Income
Net interest income consists primarily of interest earned on our credit
card loans, less interest expense on borrowings to fund the loans. Managed net
interest income for the three-month period ended March 31, 2001 was $326.5
million compared to $247.0 million for the same period in 2000. The increase in
interest income is primarily due to a $2.3 billion increase in managed
interest-earning assets and an increase in net interest margin to 13.5% from
13.2% in the first quarter of 2000. The net interest margin increase is
primarily due to lower cost of funds resulting from decreases in LIBOR.
Financing costs as a percentage of borrowings for the first quarter of 2001 was
6.7% compared with 6.8% in the same period of 2000. The decrease in borrowing
rates for the current-year period are the result of interest rate decreases made
by the Federal Reserve since March 31, 2000.
Analysis of Average Balances, Interest and Average Yields and Rates
The following table provides an analysis of interest income and
expense, net interest spread, net interest margin and average balance sheet data
for the three-month periods ended March 31, 2001 and 2000:
Three Months Ended March 31,
2001 2000
---------------------------------------------- ---------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(Dollars in thousands)
Owned Basis
Assets:
Interest-earning assets:
Federal funds sold .......... $ 164,574 $ 2,311 5.7% $ 96,684 $ 1,369 5.7%
Short-term investments ...... 280,379 3,896 5.6% 81,136 1,073 5.3%
Credit card loans and
retained interests in loans
securitized ................ 3,343,477 163,522 19.8% 1,959,196 95,359 19.6%
----------- ----------- ---- ----------- ----------- ----
Total interest-earning
assets.................... $ 3,788,430 $ 169,729 18.2% $ 2,137,016 $ 97,801 18.4%
Other assets ................ 806,136 -- -- 734,239 -- --
Allowances for loan losses .. (781,211) -- -- (649,654) -- --
----------- -----------
Total assets ................ $ 3,813,355 -- -- $ 2,221,601 -- --
=========== ===========
Liabilities and Equity:
Interest-bearing liabilities:
Deposits .................... $ 2,130,414 $ 36,623 7.0% $ 882,149 $ 13,742 6.3%
Debt ........................ 360,999 11,212 12.6% 352,899 10,366 11.8%
----------- ----------- ---- ----------- ----------- ----
Total interest-bearing
liabilities .............. $ 2,491,413 $ 47,835 7.8% $ 1,235,048 $ 24,108 7.9%
Other liabilities ........... 412,839 -- -- 332,276 -- --
----------- -----------
Total liabilities ........... 2,904,252 -- -- 1,567,324 -- --
Stockholders' equity ........ 909,103 -- -- 654,277 -- --
----------- -----------
Total liabilities and equity. $ 3,813,355 -- -- $ 2,221,601 -- --
=========== ===========
Net interest income and
interest margin (1) ...... -- $ 121,894 13.0% -- $ 73,693 13.9%
Net interest rate spread (2). -- -- 10.4% -- -- 10.5%
Managed Basis
Credit card loans ........... $ 9,394,101 $ 460,613 19.9% $ 7,352,396 $ 357,060 19.5%
Total interest-earning assets 9,839,055 466,820 19.2% 7,530,216 359,502 19.2%
Total interest-bearing
liabilities .............. 8,542,037 140,310 6.7% 6,628,248 112,529 6.8%
Net interest income and
interest margin (1) ...... -- $ 326,510 13.5% -- $ 246,973 13.2%
Net interest rate spread (2). -- -- 12.5% -- -- 12.4%
(1) We compute net interest margin by dividing annualized net interest income by
average total interest-earning assets.
(2) The net interest rate spread is the annualized yield on average
interest-earning assets minus the annualized funding rate on average
interest-bearing liabilities.
Other Operating Income
Other operating income contributes substantially to our results of
operations, representing 65% and 77% of owned revenues for the three-month
periods ended March 31, 2001 and 2000, respectively.
Other operating income decreased $13.3 million for the three-month
period ended March 31, 2001, over the comparable period in 2000. This decrease
is primarily due to the $44.0 million decrease in income generated from net
securitization and credit card servicing income primarily as a result of the
increased allowance on securitized loans. For the three-month period ended March
31, 2001, credit card fees, interchange and other credit card income increased
$12.0 million over the comparable period in 2000. This increase was primarily
due to the growth in total accounts and loans in the managed credit card
portfolio. Prior year other operating income included the $12.1 million
favorable impact related to the operational policy change in the billing of
overlimit fees in the first quarter of 2000. This impact is reflected in net
securitization and credit card servicing income and credit card fees,
interchange and other credit card income in the consolidated statements of
income for the three months ended March 31, 2000.
Enhancement services revenues increased by $18.6 million for the
three-month period ended March 31, 2001. This increase reflects the strong sales
of our debt waiver product and the increase in membership program revenues
resulting from additional product offers to third party cardholders. At
March 31, 2001 combined active enhancement members totaled approximately
5.9 million.
Other Operating Expense
Total other operating expenses for the three-month period ended March
31, 2001 increased $31.1 million over the comparable period in 2000, largely due
to costs associated with the growth of our business activities. Employee
compensation increased $11.0 million for the three-month period ended March 31,
2001 due to increased staffing needs to support the increase in credit card
accounts and enhancement services active member growth and increased collections
and customer service staff. Other expenses increased $6.4 million for the
three-month period ended March 31, 2001 due to increased fees associated with
higher credit card volume. Also, credit card account and other product
solicitation and marketing expenses increased $8.6 million over the comparable
period in 2000, largely due to increased enhancement services marketing activity
and costs associated with our credit card marketing activity which resulted in
over 260 thousand new credit card accounts during the first three months of
2001.
Income Taxes
Our provision for income taxes, which includes both federal and state
income taxes, represents an effective tax rate of 38.5% for the three-month
period ended March 31, 2001, compared to 38.8% for the same period in 2000.
Asset Quality
Our delinquency and net loan charge-off rates at any point in time
reflect, among other factors, the credit risk of loans, the average age of our
various credit card account portfolios, the success of our collection and
recovery efforts, and general economic conditions. The average age of our credit
card portfolio affects the stability of delinquency and loss rates. In order to
minimize losses, we continue to focus our resources on refining our credit
underwriting standards for new accounts, and on collections and post charge-off
recovery efforts. At March 31, 2001, 50% of managed accounts and 32% of managed
loans were less than 24 months old.
For the quarter ended March 31, 2001, our managed net charge-off ratio
was 10.6% compared to 9.8% for the quarter ended March 31, 2000. Without the
impact of purchase accounting related to acquired portfolios, the charge-off
rate was 10.7% for the three-month period ended March 31, 2001, compared to
10.2% for the same period of 2000. Our charge-offs without the impact of
purchase accounting have been stable, with losses between 9.5% and 11.0% for the
last nine quarters. We believe, consistent with our statistical models and other
credit analysis, that this rate will continue to fluctuate between this range
over the next few quarters.
We use credit line analyses, account management and customer
transaction authorization procedures to minimize loan losses. Our risk models
determine initial credit lines at the time of solicitation and generally result
in lower credit lines than the industry average. We manage credit lines on an
ongoing basis and adjust them based on customer usage and payment patterns. To
maximize profitability, we continually monitor customer accounts and initiate
appropriate collection activities when an account is delinquent or overlimit.
Delinquencies
Delinquencies not only have the potential to affect earnings in the
form of net loan losses, but are also costly in terms of the personnel and other
resources dedicated to their resolution. We monitor delinquency levels on a
managed basis, since delinquency on either an owned or managed basis subjects us
to credit loss exposure. A credit card account is contractually delinquent if we
do not receive the minimum payment by the specified date on the cardholder's
statement. It is our policy to continue to accrue interest and fee income on all
credit card accounts, except in limited circumstances, until we charge off the
account and all related loans, interest and other fees. The following table
presents the delinquency trends of our credit card loan portfolio on a managed
portfolio basis:
Managed Loan Delinquency
March 31, % of December 31, % of March 31, % of
2001 Total 2000 Total 2000 Total
---- ----- ---- ----- ---- -----
(Dollars in thousands)
Managed loan
portfolio......... $9,483,392 100% $9,273,108 100% $7,371,666 100%
Loans contractually
delinquent:
30 to 59 days .... 229,368 2.4% 228,238 2.5% 169,403 2.3%
60 to 89 days .... 178,898 1.9% 173,531 1.9% 127,872 1.7%
90 or more days... 390,402 4.1% 365,963 3.9% 267,251 3.7%
---------- ----- ---------- ----- ---------- -----
Total .......... $ 798,668 8.4% $ 767,732 8.3% $ 564,526 7.7%
========== ===== ========== ===== ========== =====
The increase in the managed delinquency rates over 2000 reflects a
slight deterioration in the economy, increased delinquencies in our secured card
portfolio and the adoption of a recent FFIEC guidelines on re-aging accounts
effective January 1, 2001, which required us to report an additional $35.3
million of receivables as delinquent.
Without the impact of purchase accounting related to acquired
portfolios, delinquency rates were 8.4%, 8.3% and 7.7%, respectively. We intend
to continue to focus our resources on our collection efforts to minimize the
negative impact to net loan losses that results from increased delinquency
levels.
Net Charge-Offs
Net charge-offs include the principal amount of losses from cardholders
unwilling or unable to pay their loan balances, as well as bankrupt and deceased
cardholders, less current period recoveries. Net charge-offs exclude accrued
finance charges and fees, which are charged against the related income at the
time of charge-off. The following table presents our net charge-offs for the
periods indicated as reported in the consolidated financial statements and on a
managed portfolio basis:
Three Months Ended
March 31,
2001 2000
---- ----
(Dollars in thousands)
Owned basis:
Average loans and retained
interests in loans securitized
outstanding ....................... $3,343,477 $1,959,196
Net charge-offs ...................... 81,437 47,573
Net charge-offs as a percentage
of average loans outstanding (1)... 9.9% 9.8%
========== ==========
Managed basis:
Average loans outstanding ............ $9,394,101 $7,352,396
Net charge-offs ...................... 244,969 178,409
Net charge-offs as a percentage of
average loans outstanding(1) ...... 10.6% 9.8%
========== ==========
(1) Annualized
Provision and Allowance for Loan Losses
We maintain an allowance for loan losses for both owned loans and the
retained interest in loans securitized. The portion allocated to the retained
interest in loans securitized represents our estimate of a valuation adjustment
to report this asset in accordance with SFAS 140. For securitized loans,
anticipated losses and related provisions for loan losses are reflected in the
calculation of net securitization and credit card servicing income. We make
provisions for loan losses in amounts necessary to maintain the allowance at a
level estimated to be sufficient to absorb probable future losses of principal
and earned interest, net of recoveries, inherent in the existing loan portfolio.
The provision for loan losses on a managed basis for the three-month
period ended March 31, 2001, totaled $267.8 million compared to a provision of
$204.5 million for the three-month period ended March 31, 2000. The increase for
the three-month period ended March 31, 2001, as compared to the three-month
period ended March 31, 2000, is reflective of the increase in loans and an
increase in charge-offs. The allowance for loan losses on a managed basis was
8.3% at March 31, 2001, compared to 8.8% at March 31, 2000.
Derivatives Activities
We use derivative financial instruments for the purpose of managing our
exposure to interest rate risks. We have a number of procedures in place to
monitor and control both market and credit risk from these derivatives
activities. Our senior management approves all derivative strategies and
transactions.
Liquidity, Funding and Capital Resources
One of our primary financial goals is to maintain an adequate level of
liquidity through active management of assets and liabilities. Because the
pricing and maturing characteristics of our assets and liabilities change,
liquidity management is a dynamic process, affected by changes in short- and
long-term interest rates. We use a variety of financing sources to manage
liquidity, refunding and interest rate risks.
`
Weighted- Weighted-
March 31, Average December 31, Average
2001 Interest Rate 2000 Interest Rate
---- ------------- ---- -------------
Total period-end
funding.............. $ 9.5 billion 6.6% $ 9.4 billion 7.1%
Bank loans................ 1.0% 9.4% 1.0% 9.4%
Bank conduit
securitizations..... 2.3% 6.1% 2.3% 7.6%
Long-term debt............ 2.7% 10.8% 2.7% 10.9%
Equity.................... 9.7% -- 9.4% --
Deposits.................. 21.8% 7.0% 22.4% 6.8%
Metris Master Trust....... 62.5% 6.2% 62.2% 7.0%
------------ ------------
100.0% 100.0%
============ ============
We finance the growth of our credit card loan portfolio through cash
flows from operations, asset securitizations, bank loans, subsidiary bank
deposits, long-term debt and equity issuances.
During the three-month period ended March 31, 2001, we received net
proceeds of approximately $100.2 million from sales of credit card loans to the
trust and conduits. We used cash generated from these transactions to fund
credit card loan portfolio growth. During the same period in 2000 we distributed
net proceeds of $282.0 million to the trust and conduits. We financed these
receivables on our balance sheet with the growth in our subsidiary bank deposit
program.
Direct Merchants Bank issues certificates of deposit of $100,000 or
more. As of March 31, 2001 and December 31, 2000, $2.1 billion of CDs were
outstanding with original maturities ranging from six months to five years and
three months to five years, respectively. These CDs pay fixed interest rates
ranging from 4.9% to 7.6% and 5.4% to 7.6%, respectively.
We have a $170 million, three-year revolving credit facility and a $100
million five-year term loan. At March 31, 2001 and December 31, 2000, we were in
compliance with all financial covenants under these agreements. At March 31,
2001 and December 31, 2000, we had outstanding borrowings of $100 million under
the term loan facility and no outstanding borrowings under the revolving credit
facility. We have also issued and sold $150 million of 10.125% Senior Notes due
2006 and $100 million of 10% Senior Notes due 2004.
As the portfolio of credit card loans grows our funding needs will
increase accordingly. We believe that our cash flows from operations, asset
securitizations, bank loans, subsidiary bank deposits, long-term debt and equity
issuances will provide us with adequate liquidity for meeting anticipated cash
needs, although no assurance can be given to that effect.
Newly Issued Pronouncements
In September 2000, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," which replaces SFAS No. 125, and revises the standards for
accounting for securitizations and after transfers of financial assets and
collateral and requires certain disclosures. It requires enterprises to
recognize, upon transfer of financial assets, the financial and servicing assets
it controls and the liabilities it has incurred, derecognize financial assets
when control has been surrendered, and derecognize liabilities when
extinguished. This statement is effective for transfers and servicing of
financial assets and extinguishment of liabilities occurring after March 31,
2001. The statement is effective for recognition and reclassification of
collateral and for disclosures related to securitization transactions and
collateral for fiscal years ending after December 15, 2000. We implemented the
disclosure requirements in our 2000 Annual Report to comply with the new
standard. The adoption of the accounting portion of the new standard will not
have a material impact on our financial statements.
Forward-Looking Statements
This quarterly report contains some forward-looking statements.
Forward-looking statements give our current expectations of future events. You
will recognize these statements because they do not strictly relate to
historical or current facts. Such statements may use words such as "anticipate,"
"estimate," "expect," "project," "intend," "think," "believe" and other words or
terms of similar meaning in connection with any discussion of future performance
of the Company. For example, these include statements relating to future
actions, future performance of current or anticipated products, solicitation
efforts, expenses, the outcome of contingencies such as litigation, and the
impact of the capital markets on liquidity. From time to time, we also may
provide oral or written forward-looking statements in other material released to
the public.
Any or all of our forward-looking statements in this report and in any
other public statements we make may turn out to be wrong. They can be affected
by inaccurate assumptions or by known or unknown risks and uncertainties. Many
factors, which can not be predicted with certainty, will be important in
determining future results. Among such factors are the lack of seasoning of our
credit card accounts which renders predictability of delinquencies more
difficult, higher default and bankruptcy rates of our target market of
moderate-income consumers, interest rate risks, risks associated with acquired
portfolios, dependence on the securitization markets and other funding sources,
state and federal laws and regulations, and general economic conditions that can
have a major impact on the performance of loans. Each of these factors and
others are more fully discussed under the caption "Business--Risk Factors"
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 2000. As a result of these factors, we cannot guarantee any
forward-looking statements. Actual future results may vary materially. Also,
please note that the factors we provide are those we think could cause our
actual results to differ materially from expected and historical results. Other
factors besides those listed here or in our 10-K for the year ended December 31,
2000, could also adversely affect us.
We undertake no obligations to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any further disclosure we make on related
subjects in our periodic filings with the Securities and Exchange Commission.
This discussion is provided to you as permitted by the Private Securities
Litigation Reform Act of 1995.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices
and rates. Our principal market risk is due to changes in interest rates. This
affects us directly in our lending and borrowing activities, as well as
indirectly, as interest rates may impact the payment performance of our
cardholders.
To manage our direct risk to market interest rates, management actively
monitors the interest rates and the interest sensitive components of our owned
and managed balance sheet to minimize the impact changes in interest rates have
on the fair value of assets, net income and cash flow. We seek to minimize the
impact of changes in interest rates on us primarily by matching asset and
liability repricings.
Our primary managed assets are credit card loans, which are virtually
all priced at rates indexed to the variable Prime Rate. We fund credit card
loans through a combination of cash flows from operations, asset
securitizations, bank loans, subsidiary bank deposits, long-term debt and equity
issuances. Our securitized loans are owned by a trust and bank-sponsored
single-seller and multi-seller receivable conduits, which have committed funding
primarily indexed to variable commercial paper rates and the London Interbank
Offered Rate ("LIBOR"). The $270 million bank credit facility has pricing that
is also indexed to LIBOR or Prime Rate. The subsidiary bank deposits are issued
at fixed interest rates. We have entered into an interest rate swap agreement
which effectively converted $249 million of deposits to rates indexed to LIBOR.
The long-term debt is at fixed interest rates. At March 31, 2001, approximately
11.7% of the trust and conduit funding of securitized receivables was funded
with fixed rate securities.
In an interest rate environment with rates at or below current rates,
88.3% of the securitization funding for the managed loan portfolio is indexed to
floating commercial paper and LIBOR rates. In an interest rate environment with
rates significantly above current rates, the potentially negative impact on
earnings of higher interest expense is mitigated by fixed rate funding and
interest rate cap contracts.
The approach used by management to quantify interest rate risk is a
sensitivity analysis, which management believes best reflects the risk inherent
in our business. This approach calculates the impact on net income from an
instantaneous and sustained change in interest rates by 200 basis points.
Assuming no counteractive measures by management, a 200 basis point increase in
interest rates affecting our floating rate financial instruments, including both
debt obligations and loans, will result in an increase in net income of
approximately $26.5 million relative to a base case over the next 12 months;
while a decrease of 200 basis points will result in a reduction in net income of
approximately $26.5 million. Our use of this methodology to quantify the market
risk of financial instruments should not be construed as an endorsement of its
accuracy or the accuracy of the related assumptions. In addition, this
methodology does not take into account the indirect impact interest rates may
have on the payment performance of our cardholders. The quantitative information
about market risk is necessarily limited because it does not take into account
operating transactions or other costs associated with managing immediate changes
in interest rates.
Part II. Other Information
Item 1. Legal Proceedings
We are a party to various legal proceedings resulting from the
ordinary business activities relating to our operations. In July 2000
an Amended Complaint was filed in Hennepin County Court in
Minneapolis, Minnesota against Metris Companies Inc. and our
subsidiaries Metris Direct, Inc. and Direct Merchants Bank. The
complaint seeks damages in unascertained amounts and purports to be a
class action complaint on behalf of all cardholders who were issued a
credit card by Direct Merchants Bank and were allegedly assessed fees
or charges that the cardholder did not authorize. Specifically, the
complaint alleges violations of the Minnesota Prevention of Consumer
Fraud Act, the Minnesota Deceptive Trade Practices Act and breach of
contract. We filed our answer to the complaint in August 2000. To
date, the complaint has not been certified as a class action claim. We
believe we have numerous substantive legal defenses to these claims
and are continuing to vigorously defend the case. There can be no
assurance that defense or resolution of these matters will not have a
material adverse effect on our financial position.
On May 3, 2001, Direct Merchants Bank entered into a consent
order with the Office of the Comptroller of the Currency ("OCC"). The
consent order requires Direct Merchants Bank to pay approximately $3.2
million in restitution to about 62,000 credit card customers who
applied for and received a credit card in connection with a series of
limited test marketing campaigns from March 1999 to June 1, 2000.
Under the terms of the consent order, Direct Merchants Bank made no
admission or agreement on the merits of the OCC's assertions. We
believe that Direct Merchants Bank's agreement with the OCC will not
have a material adverse effect on the financial position of Metris
Companies Inc. or Direct Merchants Bank.
The OCC has also indicated that it is considering whether or not
to pursue an assessment of civil money penalties and has given Direct
Merchants Bank an opportunity to provide information to the OCC
bearing on whether imposing a penalty would be appropriate and the
severity of any penalty. The statutory provisions pursuant to which a
civil money penalty could be assessed give the OCC broad discretion in
determining whether or not a penalty will be assessed and, if so, the
amount of the penalty. Because we are unable at this time to determine
whether or not any civil money penalty will be assessed, there can be
no assurance that the resolution of this matter will not have a
material adverse effect on our financial position.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
11. Computation of Earnings Per Share.
(b) Reports on Form 8-K: On May 4, 2001 the Company
filed a Current Report on Form 8-K to report an
agreement reached with the Office of the Comptroller of
the Currency by Direct Merchants Bank, National
Association, a subsidiary of Metris Companies Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
METRIS COMPANIES INC.
(Registrant)
Date: May 10, 2001 By: /s/ David D. Wesselink
-----------------------
David D. Wesselink
Vice Chairman
Principal Financial Officer
Date: May 10, 2001 By: /s/ Jeffrey D. Grosklags
-------------------------
Jeffrey D. Grosklags
Senior Vice President, Assistant Secretary
Principal Accounting Officer