摩根大通 (JPM) 2004 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the Q4 2004 Collegiate Funding Services, Inc. Earnings Conference Call. My name is Anika and I will be your coordinator for today.

At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of today’s conference. If any time during the call you require assistance, please press star followed by zero and a coordinator will be happy to assist you.

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s conference Mr. Kevin Landgraver, Chief Financial Officer. Please proceed sir.

Alright thank you. Good morning and thanks for joining us on the Collegiate Funding Services, Inc. Fourth Quarter Conference Call. I am Kevin Landgraver, Chief Financial Officer of Collegiate Funding Services.

Before we hear from Barry Morrow our Chief Executive Officer, I’d like to summarize the “Safe Harbor” notice, a complete version of which is included in today’s news release.

This conference call includes “forward-looking statements” as defined by Federal Securities Laws. For a description of the risks and uncertainties that could cause our actual results to differ materially from the “forward-looking statements,” please refer to our periodic filings with the Securities and Exchange Commission including quarterly reports on Form 10-Q and the registration statement on Form S-1. We undertake no obligation to update or revise “forward-looking statements” unless otherwise required. The company claims the protection of the Safe Harbor for “forward-looking statements” contained in the Private Securities Litigation Reform Act of 1995.

Now Barry Morrow will highlight Collegiate Funding Services’ performance for 2004 and the Fourth Quarter, then I will review the financial results and finally we’ll respond to your questions. Barry.

Thanks Kevin. Good morning everyone and thanks for joining us this morning. 2004 was a milestone year for Collegiate Funding Services and I’m very pleased with our accomplishments. We took the company public in July. We delivered strong earnings growth increasing net income to $28.6 million versus a loss of $7.5 million last year.

We had a net increase of $1.8 billion in our portfolio of federally guaranteed loans, which will continue to be a source of long-term recurring revenue.

We demonstrated our ability to diversify our products and to increase our loan originations in the growing private loan market doubling loan production to over $400 million. We have continued to grow our indirect channels through affinity relationships with schools and other partners, increasing our total relationships by some 46 percent to over 1,000 -- which will be an increasing source of future loan volume.

Collegiate Funding Services has continued this growth through organic means as well as from key acquisitions and strategic partnerships. For example the acquisition of Y2M in April of last year has increased our presence and expertise in the affinity and indirect distribution channels.

Our operational expertise and excellence was evidenced by the receipt of the Exceptional Performer designation from the Department of Education, as well as by being rated by Moody’s at the highest possible rating and we continue to be the only servicer in the business with both of these designations.

We helped 20 percent more families in 2004 by assisting some 180,000 people with their education credit needs and increased total loan production by over $200 million and we continue to be a regular issuer in the ABS markets and are improving our executions with every issuance.

I think these are pretty remarkable achievements. They not only reflect our ability to achieve results, but I also believe they are key to setting in place a solid infrastructure that will build long term value.

Now let me briefly highlight some of the key accomplishments in the fourth quarter of 2004. Loan originations were $1.5 billion for the quarter. As I mentioned previously as a result of our product diversification efforts, we increased our new customers 15 percent for the quarter as we continue to penetrate the in-school market.

The volume of private loans was $119.1 million for the fourth quarter, more than double the $55.3 million last year, it was a significant driver of our increased fee income. Our total loan portfolio was $4.7 billion, up from $2.9 billion at the same time last year. The servicing portfolio arose to $10.9 billion at the end of December from $8.9 billion one year ago.

Net revenue increased 62 percent for the fourth quarter versus last year. This was due to our origination volume, higher fee income and our expanding student loan portfolio. Total expenses were up approximately $4.6 million from the year ago period after adjusting for one-time charges in 2003. I’m pleased to point out that the expenses declined sequentially from the third to the fourth quarter of this year in line with our expectations.

Additionally, approximately 70 percent of the growth in our marketing investment on a year-over-year basis is attributable to our channel and product diversification strategies.

Diluted GAAP earnings per share were $0.55 for the fourth quarter versus $0.06 for the same quarter last year. For the full year of 2004 diluted GAAP earnings per share was $1.05 compared to a loss of $0.48 for 2003.

Now I’ll turn the call back over to Kevin to review these results in more detail.

Alright thanks, Barry and good morning again. I’d like to provide more details behind those results that Barry outlined, including more information on our origination volume, loan portfolio, income and expenses and other finance topics.

First let’s look at loan volume in a little bit more detail. As Barry noted, our loan originations were $1.5 billion for the 2004 fourth quarter, down 2.0 percent from a year ago. Year to date volume was $4.4 billion, up 5.0 percent from $4.2 billion for 2003.

The most significant origination figure is $119.1 million of private loans originated in the fourth quarter of 2004, up 115 percent from the $55.3 million we had the same quarter last year. This rate of increase was even greater than the full year rate which almost doubled our volume to $417.1 million from 2003’s $209 million.

The volume of FFELP loan originations declined a bit in the fourth quarter to $1.4 billion from $1.5 billion a year earlier. We attribute part of this decline to the two Department of Education changes that were announced in the first half of 2004 and rescinded in the third quarter. A key point is that in both 2004 and 2003 our FFELP consolidation loan volume grew in the fourth quarter versus the third quarter of each year consistent with our marketing strategies.

In terms of sold versus retained, we sold a total of $720.5 million of FFELP loan applications in the fourth quarter as well as all of our $119.1 million in private loan originations. What this means is that we retained 47.5 percent of our federally guaranteed originations in Q4 and sold 52.5 percent.

As you may know, our target for retaining versus selling FFELP originations in 2004 was about 50/50 on an annual basis, although we may vary that ratio quarterly based on the market conditions and the characteristics of the loans as we did this quarter. For 2004 year-to-date we’ve retained 50.1 percent and sold 49.9 so we were right on target.

The servicing portfolio grew $600 million in the quarter, ending with $10.9 billion of servicing assets at 12/31/2004. This is a 23 percent increase from a year ago and as for the government guaranteed loan portfolio on our balance sheet, our primary source of future revenue, we ended Q4 with $4.7 billion up 63 percent from the level of $2.9 billion a year earlier.

Let me talk about income now. Net revenue for the 2004 fourth quarter was $66.6 million up 62 percent from $41.1 million last year. The higher revenues were driven by increases in both net interest income and fee income. I’ll talk about net interest income first.

Net interest income after provision for loan losses was $16.2 million, up 80 percent from $9.0 million a year ago. The major driver of the increase was the growth in our total average student loan portfolio which increased $1.9 billion to $4.3 billion up from an average portfolio of $2.4 billion a year ago.

I should point out that our net portfolio margin decreased to 1.53 percent for the 2004 fourth quarter compared with 1.77 percent in the fourth quarter of 2003. While our yield on the student loan related assets increased 70 basis points, this was offset by an increase of 94 basis points in the average cost of funds for financing student loans. For a complete description of our net portfolio margin and its reconciliation to GAAP net interest income, please obtain the supplemental material by visiting the Investor Relations portion of our website – www.cfsloans.com.

For the latest quarter, provision for loan losses was $769,000 down from $1.3 million a year ago. A year ago, we did not have the Exceptional Performer designation. Also fixed rate floor income was $4.1 million in the latest quarter versus $5.3 million of fixed rate floor income in the fourth quarter of 2003.

Fee income was $50.4 million, up 57 percent from $32.1 million a year ago. The growth in fee income largely reflected a 59 percent increase in fee income on originations sold, to $45.5 million. The volume of loans sold increased 29 percent to $839.7 million in the fourth quarter of 2004 versus $651.7 million in Q4 ’03, which includes our significant growth in private loans.

Third party servicing fees totaled $3.3 million in the latest quarter, a slight decrease of 6.0 percent from the fourth quarter of 2003.

Lastly, fee income also included $1.6 million in advertising income associated with Y2M which was an acquisition completed in 2004.

Turning now to expenses. Total operating expenses, which includes salaries, marketing, and other SG&A, were $37.1 million in the 2004 fourth quarter compared to $37.3 million last year. The primary causes of this increase were as follows: salary and benefits expenses increased to $16.4 million, up 12 percent or $1.7 million from a year ago. This was due primarily to expenses associated with Y2M, which we acquired in April 2004, and increased healthcare costs.

Marketing and mailing expenses were $11.6 million, up $3.8 million versus a year ago. Part of this increase is due to our marketing initiatives for private loans. Our numbers also reflect the addition of Y2M’s affinity marketing expenses on a year-over-year basis. Together these products and channel changes accounted for 70 percent of our increase in this category.

In addition to these operating expenses I just mentioned, our total expenses were influenced by our hedging strategy and debt extinguishment expenses. First, we’ve deployed hedges against rapid rises in interest rates since 2003. We recorded swap interest income of $874,000 and a non-cash mark to market expense of $422,000 in Q4 2004. Now by contrast during the fourth quarter of 2003, we recorded swap interest expense of $1.2 million and non-cash mark to market income of $102,000.

The second point is that, during the fourth quarter of 2003, total expenses were impacted by a one time debt extinguishment expense of $4.8 million, when we paid off our high cost mezzanine debt.

Finally, there is no accretion of dividends on preferred shares in Q4 2004 versus $2.0 million in Q4 2003. The preferred shares were redeemed with our IPO proceeds in July.

These factors produced net income of $17.7 million or $0.55 per share on roughly 32.3 million diluted weighted average shares for the fourth quarter of ’04.

In the fourth quarter of ’03, we recorded net income of $1.2 million or $0.06 per share on roughly 20.7 million diluted weighted average shares.

So, in summary, we’re very pleased with the growth in revenue and its diversity. Although operating expenses were up, most of the increase was geared towards expanding products, channels and being a public company.

I’ll very briefly review our 2004 full year highlights. Most of the factors that drove Q4 comparisons apply to the year-to-date. Full year net interest income of $62.9 million after provisions up sharply from $19.6 million in 2003. This reflects our growth in the average student loan portfolio as a result of our decision to retain a significant portion of our government loan volume.

Year-to-date, fee income rose 38 percent to $136.4 million from $98.6 million in 2003. This was achieved even though the volume of loans sold increased 9.0 percent to $2.4 billion from $2.2 billion in 2003. The 2004 fee income included income from sold loan applications of $120.1 million; servicing fees of $12.9 million and advertising income of $3.4 million. Given the above, net revenue increased 68 percent to $198.4 million from $118.2 million in ’03.

On the expense front. Total expenses increased to $142.9 million from $119.6 million reflecting the factors I noted earlier, which brings us to net income for 2004 of $28.6 million or $1.05 per share on roughly 27.2 million diluted weighted average shares. Last year, we had a loss of 7.5 million or $0.48 per share on roughly 15.4 million shares.

To summarize, we are continuing to produce strong loan volume and to retain a significant portion of our originations. Our vertically integrated model means that we’re generating multiple revenue streams: net interest income, fees from loan sales, third party servicing fee income, and advertising revenue. While expenses have risen in keeping with changes in our business and more aggressive marketing efforts, expense growth moderated in the recent quarter and the result has been strong increases in earnings. So with that, I’m going to turn the call back to Barry.

Thanks Kevin. Again, I think 2004 was a strong year for Collegiate Funding Services and we continue to be excited about our opportunities in the education finance market. We believe that Collegiate Funding Services is better positioned today to participate in this growing market for our unique direct to consumer distribution model, our vertically integrated platform and our strong relationships with schools and other partners, allowing us to further expand our distribution channels.

Before moving into questions and answers, I’d like to take a moment to thank the entire staff of Collegiate Funding Services and its affiliates for a fantastic year. Without their continued dedication and commitment to our mission, none of this would have happened. With that, I’ll conclude my remarks and open the call up for any questions that you might have.

Ladies and gentlemen, if you wish to ask a question, please press star followed by one on your touchtone telephone. If you question has been answered or you wish to withdraw your question, please press star followed by two -- please press star one to proceed. Please standby for your first question.

Your first question comes from the line of Dan Welden of Jefferies and Company. Please proceed.

Could you guys discuss the gain on sale margin on both the consolidation product and also the private loan product in the quarter, also your outlook for that margin?

Dan this is Kevin. Yes, for the quarter -- as indicated we had about $45.5 million in gain on sale fee income from sold loans. We sold about $840 million, so that was about a 5.4 percent margin. That was up from the third quarter. We think that -- this is probably about as high as the gain gets on these. We did a lot of optimizing in the quarter trying to manage our flow and so we ended at 541basis points for the quarter. For the full year, again to reiterate the numbers $120 million in fee income on sold loans so that was for the year about 500 basis points.

Thanks. Was there any characteristic of the mix in this quarter that caused the margin to go up? What factors in the market allow for a higher margin versus a lower one?

As Kevin mentioned we do optimize -- on a percentage basis it could be the balances of loans that are coming in that we sold. Don’t forget on the federal application side is a fixed fee, it will vary in terms of the percentage based on how the flow of the given quarter. On a yearly basis we’re still you know that 500 basis points is about what we’re expecting.

Your next question comes from the line of Patricia McInerney of JP Morgan. Please proceed.

Hi guys. I was wondering if you could talk about reauthorization and maybe the President’s budget and how that may or may not impact what you’re thinking in terms of origination volumes going forward on the federally guaranteed side and then on the private side I know you’ve renewed your relationship or extended your relationship with First Marblehead earlier this week. I was wondering if you could talk about if there’s any change in thinking in terms of private loans -- in terms of continuing to sell all that volume or perhaps think about retaining some of it?

Hey Pat, this is Barry. Let me answer that a couple of ways. One, I think you need to separate out reauthorization from the President’s budget. They’re two entirely different vehicles. Now some of the things in the President’s budget may or may not end up in reauthorization and this is just the first inning in a nine-inning game, so who knows how the budget will shake out.

It does though cloud the year a bit assuming that some of these things may or may not pass. I can take a different view but again it’s pretty early in the game. Its’ got to go through budget scoring process– there’s been some blocks put up in Congress in terms of some of the proposals in the President’s budget.

The reauthorization bill that is on the floor of the House is primarily the same bill that Congressman Boehner put out last year and actually he just resubmitted his bill Tuesday of this week , after the President’s budget was put out and many of the provisions are not included in the reauthorization bill.

So bottom line is, it’s too early to tell. We are involved in the process as we go through the scoring process -- we go through the negotiations and what stays and what doesn’t stay. Many of the proposals in the President’s budget, I would think don’t score well and therefore given the deficit situation will not make it into the final legislation that may or may not be passed in 2005.

On the private credit -- the First Marblehead basically was an extension of our current agreement through July 1 of ’07. It does not require us to be exclusively partnered with them although we do like the First Marblehead relationship and it’s going very well but we don’t see any changes in our thinking going forward.

Although we’re continually thinking about the private credit business, but it doesn’t make sense for us to do something else at this time, and I think that’s what you guys pay me to do is look at our strategy and make sure there’s still the right strategy. We will question our strategies and advise as we need to.

Okay so no material change in the pricing in the First Marblehead contract then?

No material pricing change.

Your next question comes from the line of Steven Schultz of KBW. Please proceed.

Hi guys, thanks a lot. Just a follow-up -- about gain on sale margin you know obviously was elevated in this quarter; going forward where are you guys looking for the gain on sell margin to fall out? And I have a follow-up.

We think the fourth quarter again as Barry indicated and some of the pricing is structured as a fixed rate per loan so depending on the balances when you measure it as basis points there’s a little bit of volatility in that.

We’re pretty comfortable with the full year range, which is around 500 basis points. We’ve now had two solid quarters where we’re over 500 basis points so we’re comfortable with that being an expected margin on gain on sales Steve.

And then another question. On the net student loan spread. I mean it looks like backing out the floor income and the net student loans spread still came in at about 114 basis points which is on the high side relative to what kind of guidance had been.

Are you guys feeling comfortable with the net student spread loans spread hanging out here around 110 basis points or where are you expecting it to go?

Yes that’s an astute observation. You back out floor income, which again if I went over the numbers too fast for the fourth quarter it was $4.1 million. You get down to about 114 or 115 basis points and previously when we’ve been communicating with the public we expect a long-term margin to 90-110 so the reason why it’s a little bit higher I think is that as we’ve been growing our portfolio. We think some of the borrower benefits -- you know some people are participating in those, but the ones that after three or four years of on time payments there’s an interest rate reduction -- as we’re growing our portfolio that hasn’t eaten into our margins at this point.

It hasn’t. Thank you very much.

Again ladies and gentlemen please press star followed by one on your touchtone telephone. Your next question comes from the line of Beth Rosen of Merrill Lynch. Please proceed.

Hi guys. I wanted to know if you could go back to the FFELP originations in this quarter especially as it compares to the year ago. I thought that the DOE changes we felt in the third quarter so if you could go over that.

Yes, Beth -- I think when they put those policies in place we did say there could a net 100 million at risk kind of volume position. Don’t forget with this product or this program once you decide to go one way, you’re taken off the table so to speak. So it did allow some people -- actually require some people to go with a different part than they wanted to and they needed to consolidate once they did that they’re gone. So we think it did carry through in terns of not being able to recoup that volume in the fourth quarter.

And going forward through next year do you think you’ll be able to market through that or we should—

Two things on that. One, we’re always subject to policy decisions at the Department of Education. Now, of the two issues that were put on the table last year one, one has been taken off and Congress has made it fairly clear that that’s a reauthorization issue.

The other issue we called the “two step”. They actually extended the non-enforcement of that policy change through September of this year. Now there’s no guarantee they’ll extend it. There’s no guarantee Congress will let it happen outside reauthorization, but just out there as a caveat and part of that volume are going in that space if they maintain that September deadline would not be available to us again in the fourth quarter and I just can’t tell you today that I’m confident the government will extend that date or not enforce it.

Okay, thanks Barry.

Once again ladies and gentlemen to ask a question please key star followed by one on your touch-tone telephone.

At this time gentlemen there are no further questions. I’d like to turn the call over to Mr. J. Barry Morrow for closing remarks.

Thank you for taking time this morning to join us on the call. Again I think 2004 was a banner year for Collegiate Funding Services and we put in place a lot of infrastructural -- a lot of diversification strategies I think that will bode well for us as we continue to participate in this education finance market. So again, thank you for the time and have a good day.

Once again ladies and gentlemen thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.