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 September 30, 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 October 31, 2001, 63,761,612 shares of the registrant's common stock, par
value $.01 per share, were outstanding.
METRIS COMPANIES INC.
FORM 10-Q
TABLE OF CONTENTS
-----------------
September 30, 2001
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets............................3
Consolidated Statements of Income......................4
Consolidated Statements of Changes in
Stockholders' Equity..........................6
Consolidated Statements of Cash Flows..................7
Notes to Consolidated Financial Statements.............8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................................22
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.....................................36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...........................................37
Item 2. Changes in Securities.......................................37
Item 3. Defaults Upon Senior Securities.............................37
Item 4. Submission of Matters to a Vote of Security Holders.........37
Item 5. Other Information...........................................37
Item 6. Exhibits and Reports on Form 8-K............................38
Signatures..................................................39
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)
September 30, December 31,
2001 2000
------------ -----------
Assets:
Cash and due from banks .......................... $ 95,351 $ 84,938
Federal funds sold ............................... 227,568 367,937
Short-term investments ........................... 92,707 68,565
----------- -----------
Cash and cash equivalents ........................ 415,626 521,440
----------- -----------
Retained interests in loans securitized .......... 1,228,154 2,023,681
Less: Allowance for loan losses ................. 596,153 640,852
----------- -----------
Net retained interests in loans securitized ...... 632,001 1,382,829
----------- -----------
Credit card loans (net of allowance for loan
losses of $283,369 and $123,123,
respectively).................................. 2,350,859 1,056,080
Property and equipment, net ...................... 121,098 128,395
Deferred income taxes ............................ 58,937 146,345
Purchased portfolio premium ...................... 91,175 95,537
Other receivables due from credit card
securitizations, net .......................... 168,406 186,694
Other assets ..................................... 239,118 218,705
----------- -----------
Total assets ................................ $ 4,077,220 $ 3,736,025
=========== ===========
Liabilities:
Deposits ......................................... $ 2,135,538 $ 2,106,199
Debt ............................................. 451,471 356,066
Accounts payable ................................. 135,496 83,473
Deferred income .................................. 201,695 235,507
Accrued expenses and other liabilities ........... 70,075 71,227
----------- -----------
Total liabilities ........................... 2,994,275 2,852,472
----------- -----------
Stockholders' Equity:
Convertible preferred stock - Series C, par
value $.01 per share; 10,000,000
shares authorized, 1,034,365 and 967,573
shares issued and outstanding, respectively.... 385,301 360,421
Common stock, par value $.01 per share;
300,000,000 shares authorized, 64,075,654
and 62,242,787 shares issued and
outstanding, respectively...................... 641 622
Paid-in capital .................................. 229,621 198,077
Unearned compensation ............................ (4,423) --
Retained earnings ................................ 471,805 324,433
----------- -----------
Total stockholders' equity .................... 1,082,945 883,553
----------- -----------
Total liabilities and stockholders' equity .... $ 4,077,220 $ 3,736,025
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except earnings per-share data) (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Interest Income:
Credit card loans and retained
interests in loans securitized ................... $ 175,330 $ 131,326 $ 507,554 $ 339,853
Federal funds sold .................................... 364 2,444 3,004 5,540
Other ................................................. 3,513 1,070 10,585 3,007
--------- --------- --------- ---------
Total interest income ................................. 179,207 134,840 521,143 348,400
Deposit interest expense .............................. 31,427 24,321 100,986 56,369
Other interest expense ................................ 10,721 11,073 33,310 31,915
--------- --------- --------- ---------
Total interest expense ................................ 42,148 35,394 134,296 88,284
--------- --------- --------- ---------
Net Interest Income ................................... 137,059 99,446 386,847 260,116
Provision for loan losses ............................. 116,513 110,936 318,924 296,944
--------- --------- --------- ---------
Net Interest Income (Expense) After
Provision for Loan Losses......................... 20,546 (11,490) 67,923 (36,828)
--------- --------- --------- ---------
Other Operating Income:
Net securitization and credit card
servicing income ................................. 119,485 110,880 326,289 362,448
Credit card fees, interchange and
other credit card income ......................... 77,527 59,982 215,196 164,309
Enhancement services revenues ......................... 86,168 68,767 247,332 192,367
--------- --------- --------- ---------
283,180 239,629 788,817 719,124
--------- --------- --------- ---------
Other Operating Expense:
Credit card account and other product
solicitation and marketing expenses............... 42,354 36,619 134,600 105,077
Employee compensation ................................. 61,105 45,773 171,956 132,327
Data processing services and communications ........... 23,095 21,844 67,615 63,288
Enhancement services claims expense ................... 10,506 7,260 25,435 20,752
Credit card fraud losses .............................. 2,575 2,227 7,426 6,799
Purchased portfolio premium amortization .............. 7,132 3,915 22,378 14,107
Other ................................................. 42,609 32,011 120,119 95,589
--------- --------- --------- ---------
189,376 149,649 549,529 437,939
--------- --------- --------- ---------
Income Before Income Taxes and Cumulative
Effect of Accounting Changes...................... 114,350 78,490 307,211 244,357
Income taxes .......................................... 43,614 30,130 117,662 94,321
--------- --------- --------- ---------
Income Before Cumulative Effect of
Accounting Changes................................ 70,736 48,360 189,549 150,036
Cumulative effect of accounting changes
(net of income taxes of $9,000 and
$2,180, respectively).............................. -- -- 14,499 3,438
--------- --------- --------- ---------
Net Income ............................................ 70,736 48,360 175,050 146,598
Convertible preferred stock
dividends-Series C .............................. 8,788 8,036 25,784 23,404
--------- --------- --------- ---------
Net Income Applicable to Common
Stockholders..................................... $ 61,948 $ 40,324 $ 149,266 $ 123,194
========= ========= ========= =========
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Earnings per share:
Basic-income before cumulative
effect of accounting changes ...... $ 0.72 $ 0.53 $ 1.94 $ 1.70
Basic-cumulative effect of accounting
changes ........................... -- -- (0.15) (0.04)
Basic-net income ...................... 0.72 0.53 1.79 1.66
Diluted-income before cumulative
effect of accounting changes ...... 0.70 0.52 1.90 1.64
Diluted-cumulative effect of accounting
changes ........................... -- -- (0.15) (0.04)
Diluted-net income .................... 0.70 0.52 1.75 1.60
Shares used to compute earnings per share:
Basic ................................. 98,846 90,457 97,731 88,535
Diluted ............................... 101,026 93,444 99,808 91,647
Dividends declared per common share ........ $ 0.010 $ 0.010 $ 0.030 $ 0.024
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 .............. -- -- -- -- -- -- 146,598 146,598
Cash dividends .......... -- -- -- -- -- -- (2,030) (2,030)
Preferred dividends in
kind - Series C ..... 61 -- 22,761 -- -- -- (22,761) --
June 2000 three-for-two
stock split .......... -- -- -- 201 (201) -- -- --
Issuance of common stock
under employee
benefit plans ....... -- 4,211 -- 34 64,974 -- -- 65,008
------- ----------- ---------- --------- ---------- ---------- ----------- -----------
BALANCE AT SEPTEMBER 30, 2000 946 62,130 $ 352,490 $ 621 $ 195,545 $ -- $ 284,721 $ 833,377
======= =========== ========== ========= ========== ========== =========== ===========
BALANCE AT DECEMBER 31, 2000 . 968 62,243 $ 360,421 $ 622 $ 198,077 $ -- $ 324,433 $ 883,553
Net income .............. -- -- -- -- -- -- 175,050 175,050
Cash dividends .......... -- -- -- -- -- -- (2,798) (2,798)
Preferred dividends in
kind - Series C ..... 66 -- 24,880 -- -- -- (24,880) --
Issuance of common stock
under employee
benefit plans ....... -- 1,833 -- 19 31,544 (5,121) -- 26,442
Compensation expense
related to restricted
stock granted ....... -- -- -- -- -- 698 -- 698
------- ----------- ---------- --------- ---------- ---------- ----------- -----------
BALANCE AT SEPTEMBER 30, 2001 1,034 64,076 $ 385,301 $ 641 $ 229,621 $ (4,423) $ 471,805 $ 1,082,945
======= =========== ========== ========= ========== ========== =========== ===========
See accompanying Notes to Consolidated Financial Statements.
METRIS COMPANIES INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands) (Unaudited)
Nine Months Ended
September 30,
2001 2000
---- ----
Operating Activities:
Net income ........................................... $ 175,050 $ 146,598
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of accounting changes ......... 14,499 3,438
Depreciation and amortization ................... 64,395 53,791
Change in allowance for loan losses ............. 115,547 110,247
Change in value of derivative instruments ....... 3,883 --
Changes in operating assets and liabilities, net:
Deferred income taxes ....................... 87,408 2,219
Other receivables due from credit card
securitizations ........................ (2,892) 20,579
Accounts payable and accrued expenses ....... 55,800 55,199
Deferred income ............................. (33,812) 55,039
Other ....................................... (43,401) (69,512)
----------- -----------
Net cash provided by operating activities ............ 436,477 377,598
----------- -----------
Investing Activities:
Net proceeds from sales and repayments of
securitized loans ............................... 1,091,934 176,964
Net loans originated ................................. (1,609,466) (1,058,924)
Credit card portfolio acquisitions ................... (157,640) (195,597)
Additions to property and equipment .................. (6,506) (72,335)
----------- -----------
Net cash used in investing activities ................ (681,678) (1,149,892)
----------- -----------
Financing Activities:
Net increase in debt ................................. 95,405 10,913
Net increase in deposits ............................. 29,339 856,913
Cash dividends paid .................................. (2,798) (2,030)
Increase in common equity ............................ 17,441 24,225
----------- -----------
Net cash provided by financing activities ............ 139,387 890,021
----------- -----------
Net (decrease) increase in cash and cash
equivalents ..................................... (105,814) 117,727
Cash and cash equivalents at beginning of period ..... 521,440 194,433
----------- -----------
Cash and cash equivalents at end of period ........... $ 415,626 $ 312,160
=========== ===========
Supplemental disclosures and cash flow
information:
Cash paid during the period for:
Interest ........................................ $ 129,220 $ 71,151
Income taxes .................................... 25,801 75,233
Tax benefit from employee stock option
exercises........................................ 8,689 30,832
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." We are an information-based direct marketer of
consumer credit products and enhancement services, primarily to moderate-income
consumers.
We have eliminated all significant intercompany balances and transactions
in consolidation. We have reclassified certain prior-year amounts 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 amounts in
the consolidated financial statements and accompanying notes. 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 Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
(In thousands)
Income before cumulative effect of accounting changes ................. $ 70,736 $ 48,360 $189,549 $150,036
Preferred dividends - Series C ........................................ 8,788 8,036 25,784 23,404
-------- -------- -------- --------
Net income applicable to common stockholders
before cumulative effect of accounting
changes .......................................................... 61,948 40,324 163,765 126,632
Cumulative effect of accounting changes, net .......................... -- -- 14,499 3,438
-------- -------- -------- --------
Net income applicable to common stockholders .......................... $ 61,948 $ 40,324 $149,266 $123,194
======== ======== ======== ========
Weighted-average common shares outstanding ............................ 63,588 61,293 62,898 59,371
Adjustments for dilutive securities:
Assumed conversion of convertible preferred
stock ............................................................ 35,258 29,164 34,833 29,164
-------- -------- -------- --------
Basic common shares (1) ............................................... 98,846 90,457 97,731 88,535
Assumed exercise of outstanding stock
options .......................................................... 2,180 2,987 2,077 3,112
-------- -------- -------- --------
Diluted common shares ................................................. 101,026 93,444 99,808 91,647
======== ======== ======== ========
(1) In accordance with Emerging Issues Task Force ("EITF") Topic No. D-95
("Topic D-95"), we revised our computation of basic earnings per common share
("EPS"). As required by Topic D-95, the dilutive effect of our Series C
Convertible Preferred Stock is now included in the computation of basic EPS,
using the if-converted method. The Series C Convertible Preferred Stock
participates in dividends on an as-converted basis with our common stock. For
all periods presented, there is no impact to diluted earnings per share. We
restated the basic EPS amounts for the three- and nine-month periods ended
September 30, 2000 to be consistent with the revised methodology. Before the
impact of Topic D-95, basic EPS would have been $0.97, $0.66, $2.37 and $2.07
for the three- and nine-month periods ended September 30, 2001 and 2000,
respectively.
NOTE 3 - ACCOUNTING CHANGES
On January 1, 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. This statement is 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 we marked our derivatives to
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 nine months
ended September 30, 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
interest rate fluctuation. 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
London Interbank Offered 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
Metris Master Trust ("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 September 30, 2001 and December 31, 2000. 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. We recorded the reduction related to the adoption of SFAS 133 effective
January 1, 2001 as a one-time, non-cash, after-tax charge to earnings of $14.7
million. We included this one-time charge in the "Cumulative effect of
accounting change" in the consolidated statements of income for the nine months
ended September 30, 2001. We recorded the adjustment to decrease the carrying
value of the caps for the three- and nine-month periods ended September 30, 2001
as a non-cash, pre-tax charge of $6.9 million and $3.9 million, respectively, to
"Net securitization and credit card servicing income" in the consolidated
statements of income.
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. We recorded this difference
of $0.2 million as a one-time, non-cash, after-tax benefit to earnings. We
included this one-time benefit in the "Cumulative effect of accounting change"
in the consolidated statements of income for the nine months ended September 30,
2001. The interest rate swaps were substantially effective in offsetting changes
in the fair value of the hedged CD portfolio during the nine months ended
September 30, 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 in 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 nine months
ended September 30, 2000. Because we have applied the provisions of this SAB to
our membership programs since 1998, before the SEC formalized its guidance, we
did not have to adjust our membership services revenues.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Balance at beginning of period .......... $ 826,141 $ 677,121 $ 763,975 $ 619,028
Allowance related to assets acquired, net 6,063 5,963 6,063 5,963
Provision for loan losses ............... 116,513 110,936 318,924 296,944
Provision for loan losses (1) ........... 217,053 137,971 590,294 369,035
Loans charged off ....................... (320,630) (220,689) (889,782) (610,731)
Recoveries .............................. 34,382 17,973 90,048 49,036
--------- --------- --------- ---------
Net loans charged off ................... (286,248) (202,716) (799,734) (561,695)
--------- --------- --------- ---------
Balance at end of period ................ $ 879,522 $ 729,275 $ 879,522 $ 729,275
========= ========= ========= =========
(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. In doing 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 accounting principles generally accepted in the United States
of America. 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 our consumer lending products segment reports interest expense at our
weighted-average borrowing rate for the excess cash flow generated by the
enhancement services segment that is used by the consumer lending products
segment to fund the growth of cardholder balances.
Three Months Ended September 30,
2001
----
Consumer
Lending Enhancement
Products Services Reconciliation(a) Consolidated
-------- -------- ----------------- ------------
Interest income $ 514,818 $ 2,970 $ (338,581)(b) $ 179,207
Interest expense 122,539 -- (80,391)(b) 42,148
----------- ----------- ----------- -----------
Net interest
income ..... 392,279 2,970 (258,190) 137,059
Other revenue .. 155,875 86,168 41,137 283,180
Total revenue .. 548,154 89,138 (217,053) 420,239
Income before
income taxes 191,515(c) 56,776(c) (133,941)(d) 114,350
Total assets ... $10,583,562 $ 145,857 $(6,652,199)(e) $ 4,077,220
Three Months Ended September 30,
2000
----
Consumer
Lending Enhancement
Products Services Reconciliation(a) Consolidated
-------- -------- ----------------- ------------
Interest income $ 416,509 $ 3,337 $ (285,006)(b) $ 134,840
Interest expense 140,774 -- (105,380)(b) 35,394
----------- ----------- ----------- -----------
Net interest
income ..... 275,735 3,337 (179,626) 99,446
Other revenue .. 129,207 68,767 41,655 239,629
Total revenue .. 404,942 72,104 (137,971) 339,075
Income before
income taxes . 137,426(c) 44,607(c) (103,543)(d) 78,490
Total assets ... $ 8,447,600 $ 160,072 $(5,385,424)(e) $ 3,222,248
Nine Months Ended September 30,
2001
----
Consumer
Lending Enhancement
Products Services Reconciliation(a) Consolidated
-------- -------- ----------------- ------------
Interest income ........ $ 1,463,178 $ 9,792 $ (951,827)(b) $ 521,143
Interest expense ....... 395,830 -- (261,534)(b) 134,296
----------- ----------- ----------- -----------
Net interest
income ............. 1,067,348 9,792 (690,293) 386,847
Other revenue .......... 441,486 247,332 99,999 788,817
Total revenue .......... 1,508,834 257,124 (590,294) 1,175,664
Income before
income taxes
and cumulative
effect of
accounting
change.............. 522,766(c) 166,513(c) (382,068)(d) 307,211
Total assets ........... $10,583,562 $ 145,857 $(6,652,199)(e) $ 4,077,220
Nine Months Ended September 30,
2000
----
Consumer
Lending Enhancement
Products Services Reconciliation(a) Consolidated
-------- -------- ----------------- ------------
Interest income ........ $1,152,033 $ 8,239 $ (811,872)(b) $ 348,400
Interest expense ....... 378,276 -- (289,992)(b) 88,284
---------- ---------- ----------- ------------
Net interest
income ............. 773,757 8,239 (521,880) 260,116
Other revenue .......... 373,912 192,367 152,845 719,124
Total revenue .......... 1,147,669 200,606 (369,035) 979,240
Income before
income taxes
and cumulative
effect of
accounting
change.................. 420,518(c) 129,150(c) (305,311)(d) 244,357
Total assets ........... $8,447,600 $ 160,072 $(5,385,424)(e) $ 3,222,248
(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 $3.0 million for the three months ended
September 30, 2001, $3.3 million for the three months ended September 30, 2000,
$9.8 million for the nine months ended September 30, 2001 and $8.2 million for
the nine months ended September 30, 2000 of intercompany interest received by
the enhancement services segment from the consumer lending products segment.
(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 $2.6 million for the three months ended
September 30, 2001, $6.4 million for the three months ended September 30, 2000,
$8.8 million for the nine months ended September 30, 2001 and $10.8 million for
the nine months ended September 30, 2000.
(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 SHAREHOLDERS' EQUITY
On February 6, 2001, the board of directors authorized a share repurchase
program of up to $200 million of its outstanding common stock over a period
ending December 31, 2002. The amount of shares the company can repurchase in a
calendar year is limited under its various debt agreements. In 2001, the company
may repurchase up to approximately $75 million of shares. As of September 30,
2001, no shares had been repurchased under the program. Subsequent to September
30, 2001, we repurchased 0.8 million shares for $13 million.
NOTE 7 - SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS
We have various indirect subsidiaries which do not guarantee company debt.
We have presented the following condensed consolidating financial statements of
the Company, the guarantor subsidiaries and the non-guarantor subsidiaries to
comply with SEC reporting requirements. We have not presented separate financial
statements of the guarantor and non-guarantor subsidiaries because management
has determined that the subsidiaries' financial statements would not be material
to investors.
METRIS COMPANIES INC.
Supplemental Consolidating Balance Sheets
September 30, 2001
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
Assets:
Cash and cash equivalents ................. $ 7,103 $ 2,503 $ 406,020 $ -- $ 415,626
Net retained interests in loans
securitized ............................ (312) -- 632,313 -- 632,001
Credit card loans ......................... 5,809 -- 2,345,050 -- 2,350,859
Property and equipment, net ............... -- 83,036 38,062 -- 121,098
Deferred income taxes ..................... (6,117) 5,984 59,070 -- 58,937
Purchased portfolio premium ............... 248 -- 90,927 -- 91,175
Other receivables due from credit card
securitizations, net.................... 21 2,750 165,635 -- 168,406
Other assets .............................. 10,280 38,186 196,796 (6,144) 239,118
Investment in subsidiaries ................ 1,816,025 1,660,333 -- (3,476,358) --
----------- ----------- ----------- ----------- -----------
Total assets .............................. $ 1,833,057 $ 1,792,792 $ 3,933,873 $(3,482,502) $ 4,077,220
=========== =========== =========== =========== ===========
Liabilities:
Deposits .................................. $ (1,000) $ -- $ 2,136,538 $ -- $ 2,135,538
Debt ...................................... 345,697 874 104,900 -- 451,471
Accounts payable .......................... 6,083 21,953 110,532 (3,072) 135,496
Deferred income ........................... 5,605 29,185 169,977 (3,072) 201,695
Accrued expenses and other liabilities .... 393,727 (75,245) (248,407) -- 70,075
----------- ----------- ----------- ----------- -----------
Total liabilities ......................... 750,112 (23,233) 2,273,540 (6,144) 2,994,275
----------- ----------- ----------- ----------- -----------
Total stockholders' equity ................ 1,082,945 1,816,025 1,660,333 (3,476,358) 1,082,945
----------- ----------- ----------- ----------- -----------
Total liabilities and
stockholders' equity.................... $ 1,833,057 $ 1,792,792 $ 3,933,873 $(3,482,502) $ 4,077,220
=========== =========== =========== =========== ===========
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 September 30, 2001
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
Net Interest Income
(Expense)........................... $ 62,939 $ (1,962) $ 76,082 $ -- $ 137,059
Provision for loan losses ............ 874 -- 115,639 -- 116,513
--------- --------- --------- --------- ---------
Net Interest Income
(Expense) After Provision
for Loan Losses....................
62,065 (1,962) (39,557) -- 20,546
--------- --------- --------- --------- ---------
Other Operating Income:
Net securitization and
credit card servicing
income ........................... (3,774) -- 123,259 -- 119,485
Credit card fees,
interchange and other
credit card income................ 4,539 12,060 60,928 -- 77,527
Enhancement services
revenues.......................... -- 11,885 74,283 -- 86,168
Intercompany allocations ............. 11 121,492 (121,503) -- --
--------- --------- --------- --------- ---------
776 145,437 136,967 -- 283,180
--------- --------- --------- --------- ---------
Other Operating Expense:
Credit card account and
other product
solicitation and
marketing expenses................ -- (969) 43,323 -- 42,354
Employee compensation ................ 356 54,023 6,726 -- 61,105
Data processing services and
communications .................... -- (16,892) 39,987 -- 23,095
Enhancement services claims
expense............................ -- 330 10,176 -- 10,506
Credit card fraud losses ............. 1 5 2,569 -- 2,575
Purchased portfolio premium
amortization ........................ -- -- 7,132 -- 7,132
Other ................................ 37 39,784 2,788 -- 42,609
--------- --------- --------- --------- ---------
394 76,281 112,701 -- 189,376
--------- --------- --------- --------- ---------
Income (Loss) Before Income
Taxes and Equity in
Income of Subsidiaries............. 62,447 67,194 (15,291) -- 114,350
Income taxes ......................... 23,918 27,653 (7,957) -- 43,614
Equity in income of
subsidiaries....................... 32,207 (7,334) -- (24,873) --
--------- --------- --------- --------- ---------
Net Income (Loss) .................... $ 70,736 $ 32,207 $ (7,334) $ (24,873) $ 70,736
========= ========= ========= ========= =========
METRIS COMPANIES INC.
Supplemental Consolidating Statements of Income
Three Months Ended September 30, 2000
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
Net Interest (Expense)
Income............................... $ (17,105) $ (1,606) $ 118,157 $ -- $ 99,446
Provision for loan losses .............. 21 -- 110,915 -- 110,936
--------- --------- --------- --------- ---------
Net Interest (Expense)
Income After Provision
for Loan Losses...................... (17,126) (1,606) 7,242 -- (11,490)
--------- --------- --------- --------- ---------
Other Operating Income:
Net securitization and
credit card servicing
income............................... 2,379 1 108,500 -- 110,880
Credit card fees,
interchange and other
credit card income................... (1,735) 503 61,214 -- 59,982
Enhancement services
revenues............................. -- 9,188 59,579 -- 68,767
--------- --------- --------- --------- ---------
644 9,692 229,293 -- 239,629
--------- --------- --------- --------- ---------
Other Operating Expense:
Credit card account and
other product
solicitation and
marketing expenses................... -- 2,250 34,369 -- 36,619
Employee compensation .................. -- 37,969 7,804 -- 45,773
Data processing services
and communications .................. -- (21,327) 43,171 -- 21,844
Enhancement services claims
expense.............................. -- 99 7,161 -- 7,260
Credit card fraud losses ............... 1 -- 2,226 -- 2,227
Purchased portfolio premium
amortization......................... -- -- 3,915 -- 3,915
Other .................................. (396) 22,771 9,636 -- 32,011
--------- --------- --------- --------- ---------
(395) 41,762 108,282 -- 149,649
--------- --------- --------- --------- ---------
(Loss) Income Before Income
Taxes and Equity in
Income of Subsidiaries............... (16,087) (33,676) 128,253 -- 78,490
Income taxes ........................... (6,178) (13,341) 49,649 -- 30,130
Equity in income of
subsidiaries......................... 58,269 78,604 -- (136,873) --
--------- --------- --------- --------- ---------
Net Income ............................. $ 48,360 $ 58,269 $ 78,604 $(136,873) $ 48,360
========= ========= ========= ========= =========
METRIS COMPANIES INC.
Supplemental Consolidating Statements of Income
Nine Months Ended September 30, 2001
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
Net Interest Income
(Expense)............................. $ 2,002 $ (5,554) $ 390,399 $ -- $ 386,847
Provision for loan losses ............... 2,091 -- 316,833 -- 318,924
--------- --------- --------- --------- ----------
Net Interest (Expense)
Income After Provision
for Loan Losses....................... (89) (5,554) 73,566 -- 67,923
---------- --------- ---------- --------- ----------
Other Operating Income:
Net securitization and
credit card servicing
income................................ 982 -- 325,307 -- 326,289
Credit card fees,
interchange and other
credit card income.................... 1,688 21,357 192,151 -- 215,196
Enhancement services
revenues.............................. -- 43,086 204,246 -- 247,332
Intercompany allocations ................ 11 121,492 (121,503) -- --
---------- --------- ---------- --------- ----------
2,681 185,935 600,201 -- 788,817
---------- --------- ---------- --------- ----------
Other Operating Expense:
Credit card account and
other product
solicitation and
marketing expenses.................... -- 9,515 125,085 -- 134,600
Employee compensation .................... 698 151,249 20,009 -- 171,956
Data processing services and
communications ........................ 2 (69,824) 137,437 -- 67,615
Enhancement services claims
expense................................ -- 820 24,615 -- 25,435
Credit card fraud losses ................. 1 5 7,420 -- 7,426
Purchased portfolio premium
amortization .......................... -- -- 22,378 -- 22,378
Other .................................... 127 84,071 35,921 -- 120,119
--------- --------- ---------- --------- ----------
828 175,836 372,865 -- 549,529
--------- --------- ---------- --------- ----------
Income Before Income Taxes,
Equity in Income of
Subsidiaries and
Cumulative Effect of
Accounting Change...................... 1,764 4,545 300,902 -- 307,211
Income taxes ............................. 676 1,743 115,243 -- 117,662
Equity in income of
subsidiaries........................... 173,962 171,160 -- (345,122) --
--------- --------- ---------- -------- ----------
Income Before Cumulative
Effect of Accounting
Change................................. 175,050 173,962 185,659 (345,122) 189,549
Cumulative effect of
accounting change, net ................ -- -- 14,499 -- 14,499
--------- --------- ---------- -------- ----------
Net Income ............................... $ 175,050 $ 173,962 $ 171,160 $(345,122) $ 175,050
========= ========= ========== ========= ==========
METRIS COMPANIES INC.
Supplemental Consolidating Statements of Income
Nine Months Ended September 30, 2000
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
Net Interest (Expense)
Income.................................. $ (49,986) $ (3,404) $ 313,506 $ -- $ 260,116
Provision for loan losses ................ (1) -- 296,945 -- 296,944
--------- ---------- -------- --------- -----------
Net Interest (Expense)
Income After Provision
for Loan Losses........................ (49,985) (3,404) 16,561 -- (36,828)
--------- ---------- -------- --------- -----------
Other Operating Income:
Net securitization and
credit card servicing
income................................. 7,143 (3) 355,308 -- 362,448
Credit card fees,
interchange and other
credit card income..................... (4,932) 1,373 167,868 -- 164,309
Enhancement services
revenues............................... -- 36,907 155,460 -- 192,367
--------- ---------- -------- --------- -----------
2,211 38,277 678,636 -- 719,124
--------- ---------- -------- --------- -----------
Other Operating Expense:
Credit card account and
other product solicitation and
marketing expenses..................... -- 12,898 92,179 -- 105,077
Employee compensation .................... -- 108,742 23,585 -- 132,327
Data processing services
and communications .................... -- (59,180) 122,468 -- 63,288
Enhancement services claims
expense................................ -- 917 19,835 -- 20,752
Credit card fraud losses ................. 4 -- 6,795 -- 6,799
Purchased portfolio premium
amortization ............................ -- -- 14,107 -- 14,107
Other .................................... (303) 56,233 39,659 -- 95,589
--------- ---------- -------- --------- -----------
(299) 119,610 318,628 -- 437,939
--------- ---------- -------- --------- -----------
(Loss) Income Before Income
Taxes, Equity in Income
of Subsidiaries and
Cumulative Effect of
Accounting Change...................... (47,475) (84,737) 376,569 -- 244,357
Income taxes ............................. (18,325) (33,481) 146,127 -- 94,321
Equity in income of
subsidiaries........................... 175,748 227,004 -- (402,752) --
--------- ---------- -------- --------- -----------
Income Before Cumulative
Effect of Accounting
Change................................. 146,598 175,748 230,442 (402,752) 150,036
Cumulative effect of
accounting change, net ................ -- -- 3,438 -- 3,438
--------- ---------- -------- --------- -----------
Net Income ............................... $ 146,598 $ 175,748 $227,004 $(402,752) $ 146,598
========= ========== ======== ========= ===========
METRIS COMPANIES INC.
Supplemental Condensed Consolidating Statements of Cash Flows
Nine Months Ended September 30, 2001
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Consolidated
-------------- ------------ ------------ ------------
Operating Activities:
Net cash (used in) provided by operating
activities........................................ $ (41,555) $ (9,607) $ 487,639 $ 436,477
----------- ----------- ----------- -----------
Investing Activities:
Net proceeds from sales and repayments of
securitized loans ................................ -- -- 1,091,934 1,091,934
Net loans originated ................................ (3,031) -- (1,606,435) (1,609,466)
Credit card portfolio acquisition ................... -- -- (157,640) (157,640)
(Additions to) dispositions of property
and equipment..................................... -- (17,522) 11,016 (6,506)
----------- ----------- ----------- -----------
Net cash used in investing activities ............... (3,031) (17,522) (661,125) (681,678)
----------- ----------- ----------- -----------
Financing Activities:
Net increase in debt ................................ 25,322 18,831 51,252 95,405
Net increase in deposits ............................ -- -- 29,339 29,339
Cash dividends paid ................................. (2,798) -- -- (2,798)
Net (decrease) increase in equity ................... (35,704) 143 53,002 17,441
----------- ----------- ----------- -----------
Net cash (used in) provided by financing
activities........................................ (13,180) 18,974 133,593 139,387
----------- ----------- ----------- -----------
Net decrease in cash and cash equivalents ........... (57,766) (8,155) (39,893) (105,814)
Cash and cash equivalents at beginning of
period ........................................... 64,869 10,658 445,913 521,440
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period .......... $ 7,103 $ 2,503 $ 406,020 $ 415,626
=========== =========== =========== ===========
METRIS COMPANIES INC.
Supplemental Condensed Consolidating Statements of Cash Flows
Nine Months Ended September 30, 2000
(Dollars in thousands)
Unaudited
Metris Guarantor Non-Guarantor
Companies Inc. Subsidiaries Subsidiaries Consolidated
-------------- ------------ ------------ ------------
Operating Activities:
Net cash (used in) provided by operating
activities...................................... $ (85,127) $ (81,397) $ 544,122 $ 377,598
----------- ----------- ----------- -----------
Investing Activities:
Net proceeds from sales and repayments of
securitized loans .............................. -- -- 176,964 176,964
Net loans originated .............................. (1,768) -- (1,057,156) (1,058,924)
Credit card portfolio acquisition ................. -- -- (195,597) (195,597)
Additions to property and equipment ............... -- (45,960) (26,375) (72,335)
----------- ----------- ----------- -----------
Net cash used in investing activities ............. (1,768) (45,960) (1,102,164) (1,149,892)
----------- ----------- ----------- -----------
Financing Activities:
Net increase (decrease) in debt ................... 223,744 13,705 (226,536) 10,913
Net increase in deposits .......................... -- -- 856,913 856,913
Cash dividends paid ............................... (2,030) -- -- (2,030)
Net (decrease) increase in equity ................. (133,995) 119,960 38,260 24,225
----------- ----------- ----------- -----------
Net cash provided by financing activities ......... 87,719 133,665 668,637 890,021
----------- ----------- ----------- -----------
Net increase in cash and cash equivalents ......... 824 6,308 110,595 117,727
Cash and cash equivalents at beginning of
period.......................................... 43,619 309 150,505 194,433
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period ........ $ 44,443 $ 6,617 $ 261,100 $ 312,160
=========== =========== =========== ===========
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." You should read this
discussion along 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, you should read this discussion along with our
quarterly report on Form 10-Q for the period ended September 30, 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 September 30, 2001 was $70.7 million,
up from $48.4 million for the third quarter of 2000. Diluted earnings per share
for the three months ended September 30, 2001 was $0.70 compared to $0.52 per
share for the third quarter of 2000. The increase in net income is primarily due
to increases in net interest income and other operating income, partially offset
by other operating expenses. These increases are largely attributable to the
growth in average managed loans to $10.6 billion for the third quarter 2001 from
$8.2 billion for the third quarter 2000, an increase of 30%, and growth in total
credit card accounts to 4.8 million at September 30, 2001 from 4.4 million at
September 30, 2000. Enhancement services revenue, a component of other operating
income, also increased 25% to $86.2 million for the third quarter of 2001
compared to the same period in 2000.
Net income for the nine months ended September 30, 2001 was $175.1 million,
up from $146.6 million for the first nine months of 2000. Net income reported
for the nine-month periods ended September 30, 2001 and 2000 includes $14.5
million and $3.4 million, respectively, of cumulative effect of accounting
changes described below. Without these items, reported earnings would have been
$189.5 million and $150.0 million for the nine-month periods ended September 30,
2001 and 2000, respectively. Diluted earnings per share for the nine months
ended September 30, 2001 was $1.75 compared to $1.60 for the same period in
2000. Without the impact of the cumulative effect of accounting changes, diluted
earnings per share would have been $1.90 for the nine months ended September 30,
2001 compared to $1.64 for same period in 2000. The increase in net income is
primarily due to increases in net interest income and other operating income,
partially offset by increases in the provision for loan losses and other
operating expenses. These increases are largely attributable to the growth in
average managed loans to $10.0 billion for the nine months ended September 30,
2001 from $7.7 billion for the same period in 2000, an increase of 29%, along
with the previously discussed growth in credit card accounts. Enhancement
services revenue also increased 29% to $247.3 million for the nine months ended
September 30, 2001 compared to the same period in 2000.
On January 1, 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 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 nine
months ended September 30, 2001.
In September 2000 the Financial Accounting Standards Board issued SFAS 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," which replaces SFAS 125, and revises the accounting standards
and disclosure requirements for securitizations and transfers of financial
assets and collateral. 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 recognition and reclassification
of collateral and additional disclosures related to securitization transactions
and collateral were effective for fiscal years ending after December 15, 2000.
The adoption of the new standard did not have a material impact on our financial
statements.
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 nine months ended September 30,
2000. Because we have applied the provisions of this SAB to our membership
programs since 1998, before the SEC formalized its guidance, we did not have to
adjust our membership services revenues.
Managed Loan Portfolio
We analyze our financial performance on a managed loan portfolio basis. We
do this by adjusting 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 investors' interests in securitized credit
card loans. The investors' interests in securitized credit card loans are not
assets of the Company. Therefore, we do not show them on our consolidated
balance sheets. The following tables summarize our managed loan portfolio:
September 30, December 31, September 30,
2001 2000 2000
---- ---- ----
(Dollars in thousands)
Period-end balances:
Credit card loans:
Credit card loans ......... $ 2,634,228 $ 1,179,203 $ 909,605
Retained interests in loans
securitized ........... 1,228,154 2,023,681 1,899,958
Investors' interests in
securitized loans ..... 7,161,810 6,070,224 5,695,276
----------- ----------- -----------
Total managed loan portfolio . $11,024,192 $ 9,273,108 $ 8,504,839
=========== =========== ===========
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
(Dollars in thousands)
Average balances
Credit card loans:
Credit card loans ......... $ 1,837,506 $ 731,331 $ 1,563,662 $ 471,738
Retained interests in loans
securitized ............ 1,812,788 1,877,956 1,927,810 1,820,697
Investors' interests in
securitized loans ...... 6,992,493 5,601,047 6,476,755 5,434,233
----------- ---------- ----------- -----------
Total managed loan portfolio . $10,642,787 $ 8,210,334 $ 9,968,227 $ 7,726,668
=========== =========== =========== ===========
In June of 2001, a bank financing conduit that was accounted for as a sale
under SFAS 140 matured and was replaced by another financing conduit that did
not qualify as a sale under SFAS 140. As a result, approximately $855 million of
credit card loans that were classified as retained interest in loans securitized
as of December 31, 2000 were classified as credit card loans as of September 30,
2001.
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 Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
(Dollars in thousands)
Statements of Income
(owned basis):
Net interest income ........ $ 137,059 $ 99,446 $ 386,847 $ 260,116
Provision for loan losses .. 116,513 110,936 318,924 296,944
Other operating income ..... 283,180 239,629 788,817 719,124
Other operating expense .... 189,376 149,649 549,529 437,939
----------- ----------- ----------- -----------
Income before income taxes
and cumulative effect of
accounting changes ..... $ 114,350 $ 78,490 $ 307,211 $ 244,357
=========== =========== =========== ===========
Adjustments for
Securitizations:
Net interest income ........ $ 258,190 $ 179,626 $ 690,293 $ 521,880
Provision for loan losses .. 217,053 137,971 590,294 369,035
Other operating income ..... (41,137) (41,655) (99,999) (152,845)
Other operating expense .... -- -- -- --
----------- ----------- ----------- -----------
Income before income taxes
and cumulative effect of
accounting changes ...... $ -- $ -- $ -- $ --
=========== =========== =========== ===========
Statements of Income
(managed basis):
Net interest income ........ $ 395,249 $ 279,072 $ 1,077,140 $ 781,996
Provision for loan losses .. 333,566 248,907 909,218 665,979
Other operating income ..... 242,043 197,974 688,818 566,279
Other operating expense .... 189,376 149,649 549,529 437,939
----------- ----------- ----------- -----------
Income before income taxes
and cumulative effect of
accounting changes ..... $ 114,350 $ 78,490 $ 307,211 $ 244,357
=========== =========== =========== ===========
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
(Dollars in thousands)
Other Data:
(owned basis):
Average interest-earning assets...... $ 4,027,251 $ 2,824,446 $ 3,861,157 $ 2,480,251
Return on average assets (1)......... 7.2% 6.4% 6.6% 7.7%
Return on average total equity (1)... 26.8% 24.0% 26.0% 27.6%
Net interest margin (2).............. 13.5% 14.0% 13.4% 14.0%
Managed Basis:
Average interest-earning assets...... $ 11,019,743 $ 8,425,493 $ 10,337,912 $ 7,914,484
Return on average assets (1)......... 2.6% 2.2% 2.5% 2.5%
Return on average total equity (1)... 26.8% 24.0% 26.0% 27.6%
Net interest margin (2).............. 14.2% 13.2% 13.9% 13.2%
(1) Amounts for the nine-month period ended September 30, 2001 and 2000 are
shown before the cumulative effect of accounting changes.
(2) Net interest margin is equal to annualized net interest income divided by
average interest-earning assets.
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- and nine-month periods ended September 30, 2001
was $395.2 million and $1,077.1 million compared to $279.1 million and $782.0
million for the same periods in 2000. The increase in net interest income is
primarily due to $2.6 billion and $2.4 billion increases in managed average
interest-earning assets and increases in net interest margin to 14.2% for the
three-month period and 13.9% for the nine-month period ended September 30, 2001,
compared to 13.2% for both periods in 2000. The managed 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 third quarter and
year-to-date periods of 2001 were 5.0% and 5.8%, compared with 7.4% and 7.1% in
the same periods of 2000.
Analysis of Average Balances, Interest and Average Yields and Rates
The following tables provide an analysis of interest income and expense,
net interest spread, net interest margin and average balance sheet data for the
three- and nine-month periods ended September 30, 2001 and 2000:
Three Months Ended September 30,
2001 2000
--------------------------------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
(Dollars in thousands)
(owned basis)
Assets:
Interest-earning assets:
Federal funds sold .......... $ 39,735 $ 364 3.6% $ 149,496 $ 2,444 6.5%
Short-term investments ...... 337,222 3,513 4.1% 65,663 1,070 6.5%
Credit card loans and
retained interests in loans
securitized ................ 3,650,294 175,330 19.1% 2,609,287 131,326 20.0%
------------ ---------- ---- ------------ ------------ ----
Total interest-earning assets $ 4,027,251 $ 179,207 17.7% $ 2,824,446 $ 134,840 19.0%
Other assets ................ 772,649 -- -- 889,667 -- --
Allowances for loan losses .. (875,606) -- -- (713,028) -- --
------------ ------------
Total assets ................ $ 3,924,294 -- -- $ 3,001,085 -- --
============ ============
Liabilities and Equity:
Interest-bearing liabilities:
Deposits .................... $ 2,148,610 $ 31,427 5.8% $ 1,403,696 $ 24,321 6.9%
Debt ........................ 362,098 10,721 11.7% 353,626 11,073 12.5%
------------ ---------- ---- ------------ ------------ ----
Total interest-bearing
liabilities .............. $ 2,510,708 $ 42,148 6.7% $ 1,757,322 $ 35,394 8.0%
Other liabilities ........... 365,168 -- -- 440,522 -- --
------------ ------------
Total liabilities ........... 2,875,876 -- -- 2,197,844 -- --
Stockholders' equity ........ 1,048,418 -- -- 803,241 -- --
------------ ------------
Total liabilities and equity $ 3,924,294 -- -- $ 3,001,085 -- --
============ ============
Net interest income and
interest margin (1) ...... -- $ 137,059 13.5% -- $ 99,446 14.0%
Net interest rate spread (2) -- -- 11.0% -- -- 11.0%
Managed Basis
Credit card loans ........... $ 10,642,787 $ 510,942 19.0% $ 8,210,334 $ 412,996 20.0%
Total interest-earning assets 11,019,743 514,818 18.5% 8,425,493 416,510 19.6%
Total interest-bearing
liabilities .............. 9,503,201 119,569 5.0% 7,358,369 137,438 7.4%
Net interest income and
interest margin (1) ...... -- $ 395,249 14.2% -- $ 279,072 13.2%
Net interest rate spread (2) -- -- 13.5% -- -- 12.2%
(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.
Nine Months Ended September 30,
2001 2000
--------------------------------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(Dollars in thousands)
(owned basis)
Assets:
Interest-earning assets:
Federal funds sold .......... $ 77,984 $ 3,004 5.2% $ 118,939 $ 5,540 6.2%
Short-term investments ...... 291,701 10,585 4.9% 68,877 3,007 5.8%
Credit card loans and
retained interests in loans
securitized ................ 3,491,472 507,554 19.4% 2,292,435 339,853 19.8%
------------ ------------ ---- ------------ ------------ ----
Total interest-earning assets $ 3,861,157 $ 521,143 18.1% $ 2,480,251 $ 348,400 18.8%
Other assets ................ 803,437 -- -- 798,234 -- --
Allowances for loan losses .. (821,635) -- -- (674,808) -- --
------------ ------------
Total assets ................ $ 3,842,959 -- -- $ 2,603,677 -- --
============ ============
Liabilities and Equity:
Interest-bearing liabilities:
Deposits .................... $ 2,113,702 $ 100,986 6.4% $ 1,131,089 $ 56,369 6.7%
Debt ........................ 361,340 33,310 12.3% 352,478 31,915 12.1%
------------ ------------ ---- ------------ ------------ ----
Total interest-bearing
liabilities .............. $ 2,475,042 $ 134,296 7.3% $ 1,483,567 $ 88,284 8.0%
Other liabilities ........... 391,434 -- -- 393,925 -- --
------------ ------------
Total liabilities ........... 2,866,476 -- -- 1,877,492 -- --
Stockholders' equity ........ 976,483 -- -- 726,185 -- --
------------ ------------
Total liabilities and equity $ 3,842,959 -- -- $ 2,603,677 -- --
============ ============
Net interest income and
interest margin (1) ...... -- $ 386,847 13.4% -- $ 260,116 14.0%
Net interest rate spread (2). -- -- 10.8% -- -- 10.8%
Managed Basis
Credit card loans ........... $ 9,968,227 $ 1,449,589 19.4% $ 7,726,668 $ 1,143,487 19.8%
Total interest-earning assets 10,337,912 1,463,178 18.9% 7,914,484 1,152,034 19.4%
Total interest-bearing
liabilities .............. 8,951,797 386,038 5.8% 6,917,800 370,038 7.1%
Net interest income and
interest margin (1) ...... -- $ 1,077,140 13.9% -- $ 781,996 13.2%
Net interest rate spread (2) -- -- 13.1% -- -- 12.3%
(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 67% of owned revenues for the three- and nine-month
periods ended September 30, 2001.
Other operating income increased $43.6 million and $69.7 million for the
three- and nine-month periods ended September 30, 2001 over the comparable
periods in 2000. These increases are primarily due to the $17.5 million and
$50.9 million increases in income generated from credit card fees, interchange
and other credit card income due to the growth in total accounts and loans in
the managed credit card portfolio for the three- and nine-month periods ended
September 30, 2001 over the comparable periods in 2000. For the three- and
nine-month periods ended September 30, 2001 net securitization and credit card
income increased $8.6 million and decreased $36.2 million, respectively, from
the comparable periods in 2000. The decrease for the nine-month period ended
September 30, 2001 is primarily the result of the increased provision for loan
losses on securitized loans. For the nine-month period ended September 30, 2000
other operating income included the $12.1 million favorable impact related to
the operational policy change in the billing of overlimit fees. 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.
Enhancement services revenues increased by $17.4 million and $55.0 million
for the three- and nine-month periods ended September 30, 2001. These increases
reflect higher credit protection revenue due to increased receivables and higher
sales of our debt waiver products, as well as the increase in membership program
revenues resulting from additional product offers to third-party cardholders. At
September 30, 2001 combined active enhancement members totaled approximately 5.9
million compared to 6.0 million as of September 30, 2000
Other Operating Expense
Total other operating expenses for the three- and nine-month periods ended
September 30, 2001 increased $39.7 million and $111.6 million over the
comparable periods in 2000, largely due to costs associated with the growth of
our business activities. Employee compensation increased $15.3 million and $39.6
million for the three- and nine-month periods ended September 30, 2001 due to
increased staffing needs. Credit card account and other product solicitation and
marketing expenses increased $5.7 million and $29.5 million over the comparable
periods in 2000, largely due to increased costs associated with our credit card
marketing activity which resulted in over 890 thousand new credit card accounts
and 2.6 million new enhancement relationships during the first nine months of
2001. Other expenses increased $10.6 million and $24.5 million for the three-
and nine-month periods ended September 30, 2001 due to increased professional
services fees, rent and depreciation.
Income Taxes
Our provision for income taxes, which includes both federal and state
income taxes, represents an effective tax rate of 38.3% for the nine-month
period ended September 30, 2001 compared to 38.6% 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 September 30, 2001, 70% of our outstanding receivables
balance were from accounts that have been with us in excess of two years, and
40% of outstanding receivables were with us in excess of four years.
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:
September 30, % of December 31, % of September 30, % of
2001 Total 2000 Total 2000 Total
---- ----- ---- ----- ---- -----
(Dollars in thousands)
Managed Basis:
Loans outstanding......... $ 11,024,192 100% $ 9,273,108 100% $ 8,504,839 100%
Loans contractually
delinquent:
30 to 59 days........ 285,243 2.6% 228,238 2.5% 220,791 2.6%
60 to 89 days........ 221,120 2.0% 173,531 1.9% 157,923 1.9%
90 or more days...... 474,224 4.3% 365,963 3.9% 319,031 3.7%
-------------- -------- ------------ ------- -------------- -----
Total $ 980,587 8.9% $ 767,732 8.3% $ 697,745 8.2%
============== ======== ============ ======= ============== =====
The seventy basis point increase in the managed delinquency rates over
September 30, 2000 primarily reflects a deterioration in the economy and the
adoption of recent FFIEC guidelines on re-aging accounts effective January 1,
2001, which required us to report an additional $41.5 million of receivables as
delinquent as of September 30, 2001. Without the impact of the recent FFIEC
guidelines, the managed delinquency ratio was 8.5% as of September 30, 2001. We
continue to focus our resources on collection efforts to minimize delinquency
levels.
Net Charge-Offs
Net charge-offs are the principal amount of losses from cardholders
unwilling or unable to make minimum payments, bankrupt cardholders 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 on a
managed portfolio basis:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
(Dollars in thousands)
Owned basis:
Average loans and retained
interests in loans securitized
outstanding ........................ $ 3,650,294 $ 2,609,287 $ 3,491,472 $ 2,292,435
Net charge-offs ....................... 93,465 69,289 267,396 172,586
Net charge-offs as a percentage
of average loans outstanding (1).... 10.2% 10.6% 10.2% 10.1%
=============== =============== ============== =============
Managed basis:
Average loans outstanding ............. $ 10,642,787 $ 8,210,334 $ 9,968,227 $ 7,726,668
Net charge-offs ....................... 286,248 202,716 799,734 561,695
Net charge-offs as a percentage .......
of average loans outstanding (1) ... 10.7% 9.8% 10.7% 9.7%
=============== =============== ============== =============
(1) Annualized
The increase in the managed net charge off ratio for both the three and
nine month periods ended September 30, 2001 primarily reflect a deterioration in
the economy. We believe, consistent with our statistical models and other credit
analysis, this rate will continue to fluctuate between 10.5% and 11.5% over the
next few quarters.
Provision and Allowance for Loan Losses
We maintain an allowance for loan losses for 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 loan losses, net of recoveries,
inherent in the existing loan portfolio.
The provision for loan losses on a managed basis for the three- and
nine-month periods ended September 30, 2001 totaled $333.6 million and $909.2
million compared to provisions of $248.9 million and $666.0 million for the
three- and nine-month periods ended September 30, 2000. The increase for the
three- and nine-month periods ended September 30, 2001, as compared to the
three- and nine-month periods ended September 30, 2000, is reflective of the
increase in credit card loans and an increase in net charge-offs as a percentage
of managed loans outstanding.
The ratio of allowance for loan losses to period-end loans on a managed
basis was 8.0% at September 30, 2001 compared to 8.2% at December 31, 2000 and
8.6% at September 30, 2000. The reduction in the allowance as a percentage of
loans and as a percentage of 30-day plus receivables reflects a reduction in our
partially secured credit card portfolio and related reserve requirements and
continued seasoning of our credit card portfolio. As of September 30, 2001, 70%
of our outstanding receivable balance has been with us over two years.
Furthermore, we continue to see improvements in early stage delinquencies due to
tighter underwriting and better account analysis and management.
As announced on September 20, 2001, we provided relief to customers in the
geographic areas around the New York City and Washington D.C as a result of the
September 11 terrorist attacks. Customers in these areas with payment due dates
from September 11 to October 11 will not incur late fees due to possible delays
in the U.S. Postal Service. We estimate that the overall impact of this relief
program was approximately $2 million of waived late fees in the third quarter of
2001. We continue to monitor the impact of the September 11 events on
collections, charge-offs and our reserve requirements. Collections on customer
accounts and corresponding payments, subsequent to September 11, have continued
to be in line with our expectations.
We believe the allowance for loan losses is adequate to cover probable
future losses inherent in the loan portfolio under current conditions. However,
there can be no assurance as to the future credit losses that may be incurred in
connection with our loan portfolio, nor can there be any assurance that the loan
loss allowance that has been established will be sufficient to absorb future
loan losses. We continually monitor the allowance for loan losses and make
additional provisions to the allowance as we deem appropriate.
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. 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.
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. The outstanding balance and related
weighted average interest rate on our financing sources as of September 30, 2001
and December 31, 2000 are as follows:
Weighted- Weighted-
September 30, Average December 31, Average
2001 Interest Rate 2000 Interest Rate
---- ------------- ---- -------------
Term loan due 2003 ......... 100,000 6.7% 100,000 9.4%
Bank conduit due 2002 ...... 95,000 3.3% -- --
Bank conduit ............... -- -- 213,000 7.6%
Senior note due 2004 ....... 100,000 10.0% 100,000 10.0%
Senior note due 2006 ....... 145,697 11.5% 145,024 11.6%
Other long-term debt ....... 10,774 8.6% 11,042 8.4%
Equity ..................... 1,082,945 -- 883,553 --
Deposits ................... 2,135,538 5.6% 2,106,199 6.8%
Metris Master Trust ........ 7,161,810 4.2% 5,857,224 7.0%
-------------- -------------
Total period-end
funding ................. 10,831,764 4.7% 9,416,042 7.1%
============== =============
During the three- and nine-month periods ended September 30, 2001 we
received net proceeds of $399.5 million and $1,091.9 million, respectively, 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
three- and nine-month periods ended September 30, 2000 we received net proceeds
of $211.0 million and $177.0 million, respectively, from the trust and conduits.
We financed these receivables on our balance sheet with the growth in our
subsidiary bank deposit program.
Deposits consist of certificates of deposit of $100,000 or more issued by
Direct Merchants Bank, our subsidiary. Original maturities on deposits range
from six months to five years and three months to five years as of September 30,
2001 and December 31, 2000, respectively. These CDs pay fixed interest rates
ranging from 3.1% to 7.6% and 5.4% to 7.6%, respectively.
We have a $170 million, three-year revolving credit facility of which the
total amount was available at September 30, 2001 and December 31, 2000. At
September 30, 2001 and December 31, 2000 we were in compliance with all
financial covenants under our credit agreements.
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 July 2001, the Financial Accounting Standards Board issued SFAS No. 142,
Goodwill and Other Intangible Assets, which establishes accounting and reporting
standards for goodwill and other intangible assets. It requires enterprises to
test these assets for impairment upon adoption of SFAS 142 as well as on an
annual basis, and reduce the carrying amount of these assets if they are found
to be impaired. Goodwill and other intangible assets with an indefinite useful
life will no longer be amortized. Other intangible assets with an estimable
useful life will continue to be amortized over their useful lives. This
statement is effective for goodwill and intangible assets included on the
balance sheet for all fiscal years beginning after December 15, 2001. The
adoption of the new standard will not have a material impact on our financial
statements.
In October 2001, the Financial Accounting Standards Board issued SFAS No.
144, Accounting for the Impairment of Long-lived Assets and for Long-Lived
Assets to Be Disposed Of. The standard is effective for fiscal years beginning
after December 15, 2001. The new rules on asset impairment supersede FASB
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, and provide a single accounting model for
long-lived assets to be disposed of. The adoption 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 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 that
limit our business activities, product offerings and fees, privacy laws that
could result in lower marketing revenue and penalties for non-compliance, 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 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 interest
rate swap agreements which effectively converted $420 million of deposits to
rates indexed to LIBOR. The long-term debt is at fixed interest rates. At
September 30, 2001 approximately 10.0% 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, 90.0%
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 we use to quantify interest rate risk is a sensitivity
analysis, which we believe 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 that we take no
counteractive measures, 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 $18.8 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 $5.4 million.
You should not construe our use of this methodology to quantify the market risk
of financial instruments 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. The restitution as required
by the OCC consent order is reflected in our September 30, 2001
financial statements. 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 also indicated that it is considering whether
or not to pursue an assessment of civil money penalties and gave
Direct Merchants Bank the 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: Not applicable
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: November 14, 2001 By: /s/ David D. Wesselink
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David D. Wesselink
Vice Chairman
Principal Financial Officer
Date: November 14, 2001 By: /s/ Mark P. Wagener
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Mark P. Wagener
Senior Vice President, Controller
Principal Accounting Officer