Metris Reports Net Income of $32.5 Million

MINNETONKA, MN – Metris Companies Inc. today reported net income of $32.5 million for the quarter ended June 30, 2005, or earnings of $0.20 per diluted common share. This compares to a net loss of $70.3 million for the quarter ended June 30, 2004, or a loss of $1.40 per diluted common share.

The Company also reported net income of $60.1 million for the six-month period ended June 30, 2005, or earnings of $0.35 per diluted common share. This compares to a net loss of $28.7 million for the six-month period ended June 30, 2004, or a loss of $0.87 per diluted common share.

“Our business results have strengthened over the last two years, and we are encouraged by the level of net income and earnings per share we posted in the second quarter,” said Metris Chairman and Chief Executive Officer David Wesselink. “These results reflect the continued improvements in excess spread, asset quality and our cash flows, which have allowed us to pay down corporate debt in the first half of 2005 and invest more heavily in new marketing programs.”

Operating Data
New account originations for the quarter ended June 30, 2005 were 165,000. Gross active accounts were 2.2 million as of June 30, 2005, consistent with 2.2 million as of December 31, 2004, and June 30, 2004. The Company’s managed credit card loans were $5.9 billion as of June 30, 2005, compared to $6.6 billion as of December 31, 2004, and $7.1 billion as of June 30, 2004. The managed two-cycle plus delinquency rate was 7.7% as of June 30, 2005, compared to 9.1% as of December 31, 2004, and 9.4% as of June 30, 2004. The managed net charge-off rate was 13.5% for the second quarter of 2005, compared to 14.5% in the previous quarter and 17.0% for the second quarter of 2004.

Metris Master Trust Data
The three-month average excess spread in the Metris Master Trust was 6.83% as of June 30, 2005, compared to 6.47% for the prior quarter and 3.83% as of June 30, 2004. The reported two-cycle plus delinquency rate in the Metris Master Trust was 7.7% as of June 30, 2005, compared to 9.2% as of December 31, 2004, and 9.5% as of June 30, 2004. The three-month average gross default rate of the Metris Master Trust was 15.5% as of June 30, 2005, compared to 17.1% for the prior quarter and 19.2% as of June 30, 2004.

Liquidity and Funding
Consolidated total liquid assets were $287.0 million as of June 30, 2005, representing a $110.1 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 $193.5 million as of June 30, 2005, and $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 $70.0 million as of June 30, 2005, compared to $79.7 million as of December 31, 2004.

Outstanding corporate debt was $78.6 million as of June 30, 2005, representing a decrease of $295.0 million from $373.6 million as of December 31, 2004. In the second quarter of 2005, the Company made optional prepayments totaling approximately $246 million on its senior-secured credit agreement due May 2007 and its Senior Notes due July 2006, which resulted in approximately $18.2 million in costs and charges. As a result of these prepayments, the Company paid off, in full, its remaining obligations owed under the senior-secured credit agreement. Subsequent to June 30, 2005, the Company made an additional $30 million prepayment on its Senior Notes due July 2006. In addition, the Company gave notice on July 13, 2005, of its intention to make an additional prepayment of $49.1 million, which is expected to be made on August 15, 2005. Following the August prepayment, all of the Company’s corporate debt will be eliminated.

During the quarter ended June 30, 2005, the Company issued $544 million in series 2005-1 asset-backed securities from the Metris Master Trust. Asset-backed funding was $4.8 billion, with $830 million in unused conduit capacity as of June 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 June 30, 2005 and 2004 – Revenues for the quarter ended June 30, 2005 were $179.0 million, a $152.2 million increase from $26.8 million for the quarter ended June 30, 2004. Interest-only revenue increased $41.4 million due to a 300-basis-point increase in average excess spread, partially offset by a $1.1 billion decrease in average principal receivables. Loss on new securitizations decreased $77.6 million due to a lower volume of new securitizations and higher excess spread assumptions used in calculating the loss on new securitization. Loss on replenishment decreased $14.3 million primarily due to higher excess spread assumptions used in calculating the loss on replenishment. Transaction and other costs decreased $39.8 million primarily due to fees incurred in 2004 related to establishing a two-year financing conduit.

Servicing income on securitized receivables was $28.3 million for the quarter ended June 30, 2005, a decrease of $5.6 million from the second quarter of 2004 due to a $1.1 billion reduction in average principal receivables in the Metris Master Trust. Credit card loan and other interest income and credit card loan fees, interchange and other income totaled $5.1 million, a decrease of $5.1 million from the second quarter of 2004 due primarily to a reduction in average owned credit card loans of $55.3 million between the two periods. Enhancement services income was $3.0 million for the second quarter of 2005, a decrease of $4.0 million from the second quarter of 2004 primarily due to the declining number of memberships resulting from a declining portfolio.

Total expenses were $129.0 million for the quarter ended June 30, 2005, a $5.8 million increase from $123.2 million for the quarter ended June 30, 2004. The increase resulted primarily from an $18.2 million increase in marketing expense during the three months ended June 30, 2005. This increase resulted from an increase in overall account marketing to offset a decline in customer response rates consistent with current trends in the industry, an increase in partnership marketing expenditures during the quarter, and campaign expense timing. In addition, there was a $7.7 million increase in other expenses that resulted primarily from costs associated with debt repayment during the second quarter of 2005, and a $2.4 million increase in employee compensation that resulted primarily from an increase in performance-based compensation during the quarter, partially offset by a reduction in other operating expenses. Largely offsetting these increases were a $14.2 million reduction in interest expense and a $4.1 million increase in the benefit for loan losses for the quarter ended June 30, 2005. The decrease in interest expense resulted from a $277.6 million reduction in average debt outstanding between the two periods. The increase in the benefit for loan losses resulted from the sale of credit card loans from our wholly owned subsidiary Direct Merchants Credit Card Bank, N.A. to the Metris Master Trust during the quarter.

Six Months Ended June 30, 2005 and 2004 – Revenues for the six-month period ended June 30, 2005 were $329.5 million, a $124.1 million increase from $205.4 million for the six-month period ended June 30, 2004. Interest-only revenue increased $55.3 million due to a 243-basis-point increase in average excess spread, partially offset by a $1.2 billion decrease in average principal receivables. Loss on new securitizations decreased $49.7 million due to a lower volume of new securitizations and higher excess spread assumptions used in calculating the loss on new securitization. Loss on replenishment decreased $26.8 million primarily due to higher excess spread assumptions used in calculating the loss on replenishment. Transaction and other costs decreased $71.9 million primarily due to fees incurred in 2004 related to establishing a two-year financing conduit and commitment fees to insure future asset-backed transactions. These improvements were partially offset by a $47.9 million decrease in the change in fair value of retained interests in loans securitized. This decrease was primarily due to a $73.2 million larger reduction in fair value related to the change in conduit borrowings and receivable attrition, partially offset by a $22.4 million larger increase in fair value related to interest earned on cash balances at the Metris Master Trust and the release of cash restricted due to performance resulting from improved Metris Master Trust performance.

Servicing income on securitized receivables was $57.7 million for the six-month period ended June 30, 2005, a decrease of $12.4 million from the six-month period ended June 30, 2004, due to a $1.2 billion reduction in average principal receivables in the Metris Master Trust. Credit card loan and other interest income and credit card loan fees, interchange and other income totaled $12.9 million for the six-month period ended June 30, 2005, a decrease of $13.3 million from the six-month period ended June 30, 2004. This decrease was due primarily to a reduction in average owned credit card loans of $58.4 million between the two periods. Enhancement services income was $6.4 million for the six-month period ended June 30, 2005, a decrease of $8.0 million from the six-month period ended June 30, 2004, primarily due to the declining number of memberships resulting from a declining portfolio.

Total expenses were $237.2 million for the six-month period ended June 30, 2005, a $0.3 million decrease from $237.5 million from the six-month period ended June 30, 2004. Included in this decrease for the six months ended June 30, 2005 over the comparable prior year period were a $16.7 million decrease in interest expense and a $6.4 million reduction in data processing services and communications expense. The decrease in interest expense resulted from a $141.7 million reduction in average debt outstanding between the two periods. The reduction in data processing services and communications expense resulted from a reduction in average gross active accounts between the two periods. Largely offsetting these decreases was a $21.4 million increase in marketing expense during the six months ended June 30, 2005. This increase resulted from an increase in overall account marketing to offset a decline in customer response rates consistent with current trends in the industry and an increase in partnership marketing expenditures during the quarter. This increase was partially offset by a reduction in expenses associated with the termination of our obligations under a temporary servicing arrangement with the purchaser of our membership club and warranty business.