Fastest Growing Issuer

It has taken less than twenty-four months for Metris Companies to grow its card portfolio from $1 billion to more than $3.5 billion. For 1997 Metris’ card receivables more than doubled and charge volume is now growing 89% annually. While other major, aggressive players are growing from either marketing or acquisitions Metris is enjoying the best of both worlds. During the fourth quarter the nation’s preeminent sub-prime card issuer generated 350,000 new accounts and acquired 250,000 accounts. Metris’ marketing expenses totaled $8 million for the fourth quarter and $30 million for all of last year. The company’s other revenue streams are rising too. During the fourth quarter Metris signed up 288,000 card registration customers and about 245,000 extended service plan contracts. The company is also set to launch a new extended service plan product called ‘PurchaseShield’. Chargeoffs and delinquency are also beginning to moderate due to the seasoning of the portfolio. For 1997 Metris had net income of $38.1 million compared to $20.0 million for 1996.

                               METRIS  VITALS  (EOY 97)
       RECV     $3,546,936,000             Charge-Offs     8.3%        
       YTD VOL  $2,700,000,000             Delinquency*    6.6%
       ACCTS         2,293,000             Net Int Margin 13.1%
             * 30+ days past due

Banc One, Chase & BONY

Banc One reported yesterday that First USA card losses declined from 5.61% to 5.37% last year. First USA’s receivables grew 17% and cardholders grew 12% during 1997. For all of last year First USA opened a record 8.1 million new accounts including 2.4 million in the fourth quarter. Managed credit card assets totaled $40.8 billion and cardholders totaled 40.5 million at year’s end.

Meanwhile Chase Manhattan indicated yesterday that net chargeoffs for the full year were 5.66% compared with 4.87% for 1996. However Chase says card revenue increased 15% last year to $3.35 billion.

Bank of New York reported a pre-tax gain of $177 million from the sale of its $4.4 billion credit card portfolio that closed on November 24.

Pouring It On

Capital One spent $65 million for credit card solicitations during the fourth quarter, the highest quarterly marketing level to date. Last year Cap One shelled out $52 million in the fourth quarter. Year-to-date, the nation’s tenth largest issuer invested $225 million in card marketing. The investment paid off as Cap One’s earnings per share increased 21%, from $2.32 per share to $2.80 per share. This is third year in a row the company has delivered 20%+ growth in both earnings and ROE. During the fourth quarter Cap One added 1.1 million new accounts and $758 million in outstanding receivables. At year end receivables stood at $14.2 billion and total accounts at 11.7 million. Cap One also reported declining chargeoffs and delinquency rates.

Good/Bad News

More than 88% of First Chicago’s net chargeoffs were related to credit card chargeoffs. The bad news is FCC’s net chargeoff rate for the fourth quarter hit 7.0% compared to 6.7% one year ago. The good news is delinquency (30+ day) ratio dropped from 4.5% a year ago to 4.3% at the end of 1997.

Flawed Analysis

The Consumer Federation of America accused the banking industry of “irresponsible” credit card lending that has strapped an estimated 60 million American households with credit card debt exceeding $7,000 on average. To make its case the CFA cited card issuers with high charge-off rates as the most reckless. The consumer group said the “least responsible” banks include Mellon Bank and Hurley State Bank with a 9% charge-off rate, Wells Fargo with an 8.6% chargeoff rate, First Union with an 8.4% loss rate and Advanta with an 8.2% chargeoff rate. Among the “most responsible” issuers cited: MBNA with a 2.1% chargeoff rate, People’s with 2.4% loss rate, Travelers Bank at 2.7% and First USA at 2.9%. The CFA analysis is grossly flawed since it fails to take into account the growth rate in receivables for each issuer. For example chargeoffs are artificially low at MBNA and First USA since both issuers are the two fastest growing major issuers, while Wells Fargo and Advanta are among industry laggards. MBNA’s card loans grew 31% during the period cited by the CFA. By contrast Wells Fargo’s card loans only increased 8% during the same period. Advanta actually experienced a loss in card loans of 14% between mid-year 1996 and 1997. A simplistic analysis argues that if MBNA is growing four times as fast as Wells Fargo then its losses, on a percentage of outstanding basis, would be four times lower.

Growth Rates vs. Loss Rates (2Q96-2Q97)
(change in card outstandings vs charge-off rates)
Mellon -26% 9.0% MBNA +31% 2.1%

Wells Fargo +8% 8.6% People’s +23% 2.4%
First Union +10 8.4% First USA +32% 2.9%
Advanta -14% 8.2% Travelers +41% 2.7%
Source: Bankcard Update/Bankcard Barometer

Charge-Offs Stabilize

Charge-offs among credit card-backed securities declined five basis points to 6.61% for October based on performance data released last week. According to Standard & Poor’s ‘Credit Quality Index’, charge-offs ratios have been stable for the last three months however they remain significantly higher than October 1996’s ratio of 5.6%. Among major trusts with the largest declines: Capital One down 90 basis points and Household down 70 basis points. Card bonds with the largest increases include First Deposit and Banc One. First USA and Citibank were unchanged.

Sears Ratings Not Affected

Duff & Phelps Credit Rating Co. (DCR) does not expect there to be any negative rating implications for Sears Roebuck and Co. as a result of Sears recent earnings announcement, which disclosed adverse trends in its credit card business.

Of concern is that the company is continuing to record significant increases in delinquency and charge-off rates, contrary to industry experience. While the adverse credit trends will likely affect fourth quarter 1997 results, the negative impact should be mitigated by the recent implementation of more proactive risk management practices. Positively, Sears` retail businesses remain fundamentally strong and well positioned. DCR rates the senior debt of Sears, Roebuck and Co. and its financing subsidiary, Sears Roebuck Acceptance Corp. (SRAC) `A` (Single-A). SRAC`s commercial paper is rated `D-1` (D-One).

Adjusting for FAS 125, Sears recorded an 85 percent or $231 million increase in the provision for uncollectibles during third quarter 1997. While there has been a flattening of personal bankruptcy filings, delinquencies and losses continue to rise. At the end of third quarter 1997, 60-day-plus delinquencies comprised 6.9 percent of the portfolio versus 5.3 percent a year ago and 5.9 percent at the end of second quarter 1997. The higher delinquencies and losses are largely associated with Sears aggressive investment in new account growth of recent years. Sears has responded by slowing new account origination activity, bolstering its collections operation and reducing credit lines to customers who are showing negative trends in behavioral patterns and creditworthiness. Positively, higher pricing initiated earlier this year allowed the net interest margin to expand by $259 million or 288 basis points, which mitigated the effects of rising losses. Sears` asset quality trends are contrary to industry performance and are deviating from the company`s own historical experience. Consequently, management is not comfortable in forecasting near-term financial performance in its credit card operations or on a consolidated basis, but DCR does not believe the current difficulties will warrant any rating action.

Metris Gets B+

Standard & Poor’s gave one of the nation’s fastest growing issuers a B+ rating for its $100 million senior note offering Friday. S&P says the rating reflects concerns over Metris’ aggressive internal growth rate, which has been running at an annual rate of 60%+ this year. S&P also noted the company has experienced a rapid, above average, increase in chargeoffs, and when factoring in the company’s growth rate, the 12-month lagged chargeoff ratio exceeds 16% for the third quarter.

Total Debt Recovery Solution

American Management Systems (AMS) and Dozier Electronic Commerce Solutions today announced an alliance to provide their clients full collections and recovery management support for consumer and small business financial accounts. The alliance, announced at the Credit Card Collections Conference VI, enables clients of AMS’s collections solutions, CACSPlus(R) and CMS(R), to process seriously delinquent accounts through integration with Dozier Electronic Commerce Solutions’ broad based network of third party collectors.

Using advanced decision management techniques, a financial institution can determine which customer accounts to outsource for recoveries and which accounts to retain. Dozier Electronic Commerce Solutions assists in determining the most effective strategies for handling pre-charge-off and charge-off accounts through advanced relational analyses and segmentation modeling, and maintains the accounting for charged-off accounts. Dozier also provides full portfolio performance reports to the financial institution.

“Financial institutions are seeking flexible ways to manage delinquent accounts, consistent with their overall relationship with their customers,” said Sandra Devine, Vice President, AMS’s Consumer Financial Services Group. “AMS’s alliance with Dozier gives our clients an excellent option to effectively manage their risk on delinquent accounts while maintaining their own relationship with particular customers or customer segments.”

“This fully integrated solution significantly increases a financial institution’s return on delinquent account portfolios through active account management using a variety of distribution channels,” said John Dozier, President and CEO of Dozier Electronic Commerce Solutions. “We are pleased to work with AMS to provide its clients these enhanced collections and risk management services.”

Dozier Electronic Commerce Solutions is a business process outsourcer providing electronic commerce, data warehousing and portfolio analysis services to the debt collection industry. The company’s offerings include legal network services, financial EDI (Electronic Data Interchange), and portfolio segmentation analytics. Dozier also delivers innovative electronic commerce solutions to a far range of companies moving information in the debt collection industry. Dozier Electronic Commerce Solutions is an award winning, privately held, venture-backed technology company headquartered in Richmond, Virginia.

AMS’s business is to partner with clients to achieve breakthrough performance through the intelligent use of information technology. AMS is an international business and information technology consulting firm that provides a full range of services: business re-engineering, change management, systems integration, and systems development and implementation. AMS, which completed its 27th consecutive year of growth, is headquartered in Fairfax, Virginia, with offices in 53 cities worldwide. AMS’s revenues for 1996 were $812 million.

AMS’s site on the World Wide Web is:

Dozier Electronic Commerce Solutions’ site is:

Losses Uptick Again

Chargeoffs reported in October for the September collection period increased slightly to 6.65% according to the Fitch Credit Card Performance Index. Master trusts reporting the largest increases in chargeoffs for the September collection period were: Advanta, BankAmerica, Discover, First Chicago and Sears. Meanwhile, Standard & Poor says charge-offs ticked up modestly in September 1997 to 6.7%. S&P says the increase in September’s index was largely attributable to two major trusts, Discover and First Chicago. Losses fell sharply in Banc One’s master trust to 7.1% from over 9% in June, July, and August, and First USA’s ratio declined to 5.9%, reflecting normalization of its ratio following a change in its charge-off policy.

SPS Chargeoffs/Delinquencies Top 9%

SPS Transaction Services, Inc. today reported net income of $9.8 million or 36 cents per share for the quarter ended September 30, 1997, as compared to $5.6 million or 21 cents per share for the same period last year. Third quarter net operating revenues were $82.4 million, a 3 percent increase over $79.6 million in 1996.

Net income for the nine months ended September 30 was $26.2 million, or 96 cents per share, a 13 percent increase compared to 85 cents for the same period in 1996. Net operating revenues for the first nine months have increased 3 percent to $260.6 million.

“We believe the increase in our earnings over the past two quarters is confirmation that we are on the right track,” said Robert L. Wieseneck, SPS president and chief executive officer. “We continue to focus on improving the profitability of our asset-based consumer credit card business while emphasizing profitable growth in our fee-based businesses.”

The company reported a 25 percent increase in active commercial accounts at the end of the quarter to 955,000 from 764,000 a year ago. Electronic transactions processed for the quarter were 118.5 million, an 8 percent increase year over year. TeleServices average revenue per call increased while third quarter customer contacts decreased 4 percent.

Total loans outstanding, which represent both owned and securitized credit card loans, were $1.8 billion at September 30, 1997, down from $2.0 billion at the end of the same period last year. Active consumer private label accounts, both owned and managed, decreased to 3.0 million from 3.3 million at the end of the third quarter last year.

SPS Transaction Services, Inc., a majority-owned subsidiary of Morgan Stanley, Dean Witter, Discover & Co., provides a range of technology outsourcing services including the processing of credit card transactions, private label credit card programs, commercial accounts receivable processing and call center teleservices activities.

Financial Highlights

(In Thousands, Except Per Share Data)

Three Months Ended September 30,
1997 1996 % Change

Net Operating Revenues $ 82,351 $ 79,572 3%
Net Income $ 9,839 $ 5,598 76%
Net Income per Common Share $ 0.36 $ 0.21 71%

Weighted Average Common Shares
Outstanding 27,217 27,194 —

Nine Months Ended September 30,

1997 1996 % Change
Net Operating Revenues $ 260,598 $ 251,879 3%
Net Income $ 26,214 $ 23,226 13%
Net Income per Common Share $ 0.96 $ 0.85 13%

Weighted Average Common Shares
Outstanding 27,208 27,165 —


(In thousands, except per share data)

Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
(Unaudited) (Unaudited)
Processing and service
revenues $66,507 $65,712 $209,080 $204,808
Merchant discount revenue 3,981 10,163 10,797 25,382
Total 70,488 75,875 219,877 230,190

Interest revenue 58,038 53,972 184,515 166,118
Interest expense 17,695 18,238 57,521 59,824

Net interest income 40,343 35,734 126,994 106,294
Provision for loan losses 28,480 32,037 86,273 84,605

Net credit income 11,863 3,697 40,721 21,689

NET OPERATING REVENUES 82,351 79,572 260,598 251,879

Salaries and employee
benefits 27,064 23,736 84,861 72,407
Processing and service
expenses 22,153 26,589 74,849 80,096
Other expenses 17,110 20,221 58,194 61,915

Total operating expenses 66,327 70,546 217,904 214,418

Income before income taxes 16,024 9,026 42,694 37,461
Income tax expense 6,185 3,428 16,480 14,235

NET INCOME $ 9,839 $ 5,598 $ 26,214 $ 23,226

NET INCOME PER COMMON SHARE $ 0.36 $ 0.21 $ 0.96 $ 0.85

Weighted Average Common Shares
Outstanding 27,217 27,194 27,208 27,165



(In thousands, except share data)

September 30, December 31,
1997 1996

Cash and due from banks $ 15,169 $ 15,205
Investments held to maturity – at
amortized cost 41,576 41,675
Credit card loans 1,245,080 1,637,507
Allowance for loan losses (75,236) (88,397)

Credit card loans, net 1,169,844 1,549,110
Accrued interest receivable 18,512 21,141
Accounts receivable 29,551 42,202
Due from affiliated companies 8,115 9,900
Amounts due from asset securitizations 56,915 —
Premises and equipment, net 29,431 25,294
Deferred income taxes 33,409 38,266
Prepaid expenses and other assets 14,672 17,992

TOTAL ASSETS $1,417,194 $1,760,785

Noninterest-bearing $ 4,500 $ 9,012
Interest-bearing 531,332 454,423

Total deposits 535,832 463,435
Accounts payable, accrued expenses
and other 47,016 50,019
Income taxes payable 3,383 17,756
Due to affiliated companies 557,262 982,547
Accrued recourse obligation 22,636 22,636

Total liabilities 1,166,129 1,536,393

Preferred stock, $1.00 par value, 100,000
shares authorized; none issued or
Common stock, $.01 par value, 40,000,000 and
40,000,000 shares authorized; 27,270,663 and
27,242,207 shares issued; 27,220,277 and
27,187,462 shares outstanding at September 30,
1997 and December 31, 1996, respectively 273 272
Capital in excess of par value 81,493 81,096
Retained earnings 170,559 144,345
Common stock held in treasury, at cost, $.01
par value, 50,386 and 54,745 shares at
September 30, 1997 and December 31, 1996,
respectively (1,242) (1,312)
Stock compensation plan 483 453
Employee stock benefit trust (483) (413)
Unearned stock compensation (18) (49)

Total stockholders’ equity 251,065 224,392

EQUITY $1,417,194 $1,760,785


Three Months
Three Months Ended Ended Nine Months Ended
September 30, June 30, September 30,
1997 1996 1997 1997 1996
(unaudited) (unaudited) (unaudited)
Income Statement
Data (thousands)
services $22,771 $20,698 $24,169 $71,402 $62,787
Managed Programs 21,296 21,074 22,328 67,019 66,312
HSB Programs 12,310 13,107 11,576 37,905 36,308
Servicing fees on
loans 10,130 10,833 9,191 32,754 39,401

Processing and
revenues $66,507 $65,712 $67,264 $209,080 $204,808

Balance Sheet Data
Total loans* $1,825.1 $2,013.4 $1,918.6 $1,825.1 $2,013.4
Owned loans $1,245.1 $1,433.4 $1,338.6 $1,245.1 $1,433.4

Total loans* $1,875.4 $2,003.7 $2,007.6 $2,017.8 $2,099.7
Owned loans $1,295.4 $1,423.7 $1,427.6 $1,437.8 $1,517.0

Operating Data
processed 118,548 110,136 109,064 329,494 312,103
processed** 1,946 2,023 2,117 6,613 6,762
Active consumer
private label
(end-of-period) 2,966 3,337 3,075 2,966 3,337
Active commercial
(end-of-period) 955 764 945 955 764

Asset Quality
Net charge-off
%(Total loans)* 9.4% 8.4% 8.8% 9.0% 7.3%
Net charge-off
%(Owned) 9.9% 8.9% 8.8% 9.2% 7.4%

30-89 days
%(Total loans)* 5.7% 5.3% 5.0% 5.7% 5.3%
30-89 days
%(Owned) 6.2% 5.7% 5.4% 6.2% 5.7%

90-179 days
%(Total loans)* 4.1% 3.8% 3.7% 4.1% 3.8%
90-179 days
%(Owned) 4.6% 4.1% 4.0% 4.6% 4.1%

Allowance for loan
losses (Owned)
(thousands) $ 75,236 $ 65,648 $ 79,120 $ 75,236 $ 65,648

Allowance for
loan losses
%(Owned) 6.0% 4.6% 5.9% 6.0% 4.6%

* Total loans represents both
owned and securitized credit
card loans.

**Reflects a correction to previously released 1997 contacts processed.
Contacts processed increased by 121 thousand and 216 thousand for the
first and second quarter of 1997, respectively.

Sears Card Concerns

Sears’ card loans rose to $27 billion for the third quarter compared to $25 billion for third quarter 1996 but the company is very concerned about adverse industry trends as it heads into the fourth quarter. The company said yesterday: “Sears continues to experience an increase in the rate of delinquencies and charge-offs while a number of other credit card issuers have recently reported a flattening in their charge-off rates. If our delinquency and uncollectible accounts could have a significant adverse effect on the company’s overall operating results in future periods. We are taking steps to mitigate the effect of these trends on earnings, and are assessing their expected magnitude and duration.”