Metris Reports Net Income of $53.7 Million

Business Wire, Oct 24, 2005

MINNETONKA, Minn. -- Metris Companies Inc. (NYSE:MXT) today reported net income of $53.7 million for the quarter ended September 30, 2005, or earnings of $0.39 per diluted common share. This compares to net income of $61.8 million for the quarter ended September 30, 2004, or earnings of $0.48 per diluted common share.

The Company also reported net income of $113.7 million for the nine-month period ended September 30, 2005, or earnings of $0.74 per diluted common share. This compares to net income of $33.0 million for the nine-month period ended September 30, 2004, or earnings of $0.01 per diluted common share.

"Our third quarter reflects the improved operating performance we have seen over the last two years," said Metris Chairman and Chief Executive Officer David Wesselink. "These results demonstrate the improvements in the year to date excess spread, asset quality and our cash flows, which have allowed us to eliminate all of our corporate debt and invest more heavily in new marketing programs."

Merger Update

On August 4, 2005, the Company announced a definitive agreement for HSBC Finance Corporation to acquire Metris in an all-cash transaction. Metris will become a wholly owned subsidiary of HSBC Finance Corporation upon completion of the transaction. The acquisition is subject to certain conditions, including resolution of the potential civil injunctive action of the SEC against Metris that was disclosed by the Company on July 12, 2005, approval by the stockholders of Metris, and various regulatory consents. Metris and HSBC have made all regulatory filings required to date and continue to expect the merger will be completed in the fourth quarter.

Operating Data

New account originations for the three- and nine-month periods ended September 30, 2005 were 249,000 and 577,000, respectively. Gross active accounts were 2.2 million as of September 30, 2005, consistent with 2.2 million as of December 31, 2004, and September 30, 2004. The Company's managed credit card loans were $5.8 billion as of September 30, 2005, compared to $6.6 billion as of December 31, 2004, and $6.8 billion as of September 30, 2004. The managed two-cycle plus delinquency rate was 8.0% as of September 30, 2005, compared to 9.1% as of December 31, 2004, and 9.7% as of September 30, 2004. The managed net charge-off rate was 12.0% for the third quarter of 2005, compared to 13.5% in the previous quarter and 14.6% for the third quarter of 2004.

Metris Master Trust Data

The three-month average excess spread in the Metris Master Trust was 8.49% for the quarter ended September 30, 2005, compared to 6.83% for the prior quarter and 5.58% for the quarter ended September 30, 2004. The reported two-cycle plus delinquency rate in the Metris Master Trust was 8.1% as of September 30, 2005, compared to 9.2% as of December 31, 2004, and 9.7% as of September 30, 2004. The three-month average gross default rate of the Metris Master Trust was 13.9% for the quarter ended September 30, 2005, compared to 15.5% for the prior quarter and 16.8% for the quarter ended September 30, 2004.

Liquidity and Funding

Consolidated total liquid assets were $167.1 million as of September 30, 2005, representing a $230.0 million decrease from $397.1 million as of December 31, 2004. The amount of total liquid assets held by the parent company and its non-bank subsidiaries was $92.5 million as of September 30, 2005, compared to $229.6 million as of December 31, 2004. The liquidity reserve deposit held by our bank subsidiary, which is not included in total liquid assets, was $86.3 million as of September 30, 2005, compared to $79.7 million as of December 31, 2004.

The Company had no corporate debt as of September 30, 2005, representing a decrease of $373.6 million from December 31, 2004. The Company made optional prepayments totaling approximately $79.1 million on its Senior Notes due July 2006 in the third quarter of 2005.

Asset-backed funding was $4.7 billion, with $160 million in unused conduit capacity as of September 30, 2005, compared to $5.3 billion of asset-backed funding, with $840 million in unused conduit capacity as of December 31, 2004.

Results of Operations

Three Months Ended September 30, 2005 and 2004

Revenues for the quarter ended September 30, 2005 were $184.5 million, a $9.9 million decrease from $194.4 million for the quarter ended September 30, 2004. Interest-only revenue increased $34.5 million for the quarter ended September 30, 2005 from the quarter ended September 30, 2004. This increase resulted from a 291-basis-point increase in average excess spread, partially offset by a $918.2 million decrease in average principal receivables. In addition, loss on replenishment of receivables to the Metris Master Trust decreased $22.7 million primarily due to higher excess spread assumptions and lower weighted average months to maturity used in calculating the loss on replenishment.

Loss on new securitizations of receivables to the Metris Master Trust was $7.1 million for the quarter ended September 30, 2005 compared to zero in the prior year period as there was no securitization activity during the third quarter of 2004. The change in fair value of retained interests in loans securitized decreased $45.5 million to a loss of $20.0 million for the quarter ended September 30, 2005, compared to income of $25.5 million for the quarter ended September 30, 2004. The decrease in change in fair value revenue resulted primarily from a $15.3 million decrease in the change in fair market value associated with the impact of receivable attrition on a higher interest-only strip receivable, an $18.1 million smaller increase in the change in the fair market value of the interest-only strip receivable related to a smaller increase in excess spread assumptions for the quarter, and a $12.1 million decrease related to lower spread reserve releases in the third quarter of 2005.