摩根大通 (JPM) 2005 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the Q1 2005 Collegiate Funding Services Incorporated earnings conference call. My name is Jen and I will be your coordinator for today.

(OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host for today's call, Mr. Kevin Landgraver, CFO. Please proceed sir.

Great. Thank you. Good morning and thank you all for joining us on the Collegiate Funding Services Inc. 2005 first quarter conference call. I'm 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 the annual report on Form 10-K and the quarterly reports on Form 10-Q. 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 will highlight Collegiate Funding Service's performance for the 2005 first quarter, and then I'll come back to review the financial results and then we'll respond to your questions. Barry?

Thanks Kevin. Good morning and thank you for joining us. I'm pleased to report that we're off to a good start in 2005, delivering strong first quarter results. We maintained our role as a leading source of education finance solutions with total loan originations just slightly over $1 billion, in line with our expectations.

The private loan component of our business continued to grow dramatically with the volume rising 78% over the first quarter of 2004. Our student loan portfolio ended the quarter at more than $5 billion, an increase of 50% from a year ago. And our servicing portfolio now stands at $11.5 billion, up 20% from the first quarter of 2004.

We posted a significant increase in net income, which was $7.9 million, or $0.24 per diluted share for the first quarter versus $1.2 million or $0.05 per share a year ago. This strong performance reflects increases in both fee income and net interest income resulting from our strategies to build diverse and sustainable revenue streams.

And we continue to expand our distribution channels by forming additional relationships with schools, alumni associations, and other partners. During the first quarter of 2005, our in-school loan originations, which consists of most of our private loan production, as well as Stafford and PLUS loans, increased to $74.5 million versus $30 million in the first quarter of 2004.

All in all, I'm very pleased with our results for the quarter, and continue to be optimistic about our future. Our position within this industry, with its embedded growth characteristics, will allow us to continue to provide products and services to our customers that help them achieve their individual goals.

Now, I'll turn the call back over to Kevin to review the financial results in more detail.

All right. Thanks Barry and good morning again, and now I'd like to provide a little bit more detail behind the results that Barry briefly outlined, including more information on our origination volume, loan portfolio, as well as income and expenses.

First, let's look at loan volume in more detail. As Barry noted, our loan originations for the 2005 first quarter were $1.03 billion, right on top of last year. We realized the strong growth in the private loan area with originations and sales of $82 million, 78% higher than the $46 million level we achieved in the first quarter of 2004.

Looking now at our government guaranteed loan volume, of our total 2005 first quarter FFELP loan originations of $945 million, we retained approximately 58%, and sold 42%. We implemented changes to our decisioning model in the first quarter of 2005, which caused slightly higher retention than our stated annual retention target of around 50%.

The government guaranteed loan portfolio, a primary source of future revenue, ended the quarter at $5.1 billion, up 50% from the level of $3.4 billion at March 31, 2004.

The servicing portfolio was $11.5 billion at the end of 2005 first quarter, a 20% increase from $9.6 billion a year ago.

Now, let me talk about income.

Net revenue for the 2005 first quarter was $47 million, up 36% from $34.6 million last year. The higher revenue was driven by increases in net interest income and to a greater extent, fee income.

I'll talk about net interest income first. Net interest income after provision for loan losses, was $16.4 million, up 27% from $12.9 million a year ago. A decline in fixed rate floor income from $6.5 million in Q1 '04, to $2.1 million in Q1 of '05 influenced these results.

From a margin perspective, we use net portfolio margin to look at the spread on our student loan financings. As noted in the press release, which reconciles net portfolio margin back to GAAP net interest income, our net portfolio margin declined from 177 basis points to 138, as short-term debt cost increased. However, after adjusting for the impact of fixed rate floor income, we've seen an improvement in our margins as we've improved our securitization performance and deployed restricted cash more effectively.

For the latest quarter, the provision for loan losses was $583,000, down from $927,000 a year ago, when we did not yet have the annual Department of Education exceptional performer designation.

Fee income was $30.6 million for the 2005 first quarter, up 40% from $21.8 million a year ago. The growth in fee income largely reflected a 40% increase in fee income on originations sold, which was $26 million. This was influenced by slightly more loans being sold at a higher fee. Third-party servicing fees totaled $3.2 million in the 2005 first quarter, even with last year, and fee income also included $1.4 million in advertising income associated with Y2M, which was acquired subsequent to the 2004 first quarter.

Turning now to expenses, total operating expenses, which includes salaries, marketing and other SG&A, were $35.3 million in the 2005 first quarter, compared with $27.8 million last year.

The primary causes of this $7.5 million increase were as follows. Salary and benefits expenses increased to $16 million, up 15% from a year ago. This was due primarily to expenses associated with Y2M, which we acquired in April of '04, and increased healthcare costs.

Marketing and mailing expenses were $10.6 million, up 64% from a year ago. As has been the case for the past few quarters, part of this increase reflects our heightened marketing activity targeted towards the private loan market, as well as the addition of Y2Ms affinity marketing expenses on a year-over-year basis.

Other SG&A expenses increased to $8.8 million, up approximately 19% with most of the increases attributable to expenses associated with our status as a public company, and miscellaneous Y2M expenses.

In addition to these operating expenses I just mentioned, our hedging strategy is the last component of total expenses for the quarter. We recorded cash swap interest income of $1.1 million and non-cash mark-to-market income from derivatives and related instruments of $306,000 in Q1, '05. This contrasts with the first quarter of '04 when we recorded cash swap interest expense of $1.6 million and non-cash mark-to-market income of $226,000. We deploy interest rate swaps when creating new securitizations to offset rapid changes in interest rates. For Q1, '05, the cash swap interest income offset some of the decline in fixed rate floor income I mentioned previously.

Finally, there was no accretion of dividends on preferred shares in the first quarter of '05, versus $2.1 million in the year ago period. The preferred shares were redeemed with our IPO proceeds in July.

All these factors produced net income of $7.9 million or 24 cents per share on roughly 32.4 million diluted weighted average shares for the first quarter of '05. In the same period of '04, we recorded net income of $1.2 million or $0.05 per share on roughly 22.9 million diluted weighted average shares.

With that, let me turn the call back to Barry.

Thanks Kevin. I think we're off to a good start in 2005, and I would like to thank all of our associates for their hard work and dedication. We have demonstrated our ability to generate loan volume with a growing range of products.

We have a quality portfolio along with diverse and growing sources of income and we are increasing our traction in the in-school segment of our customer base, particularly with private loan products. We plan to continue our diversification strategies, and we are confident that Collegiate Funding Services can continue to build on our solid platform during the balance of 2005 and beyond. 2005 will have some different characteristics due to the fact this is the first year since 2000 that we are facing an increasing rate environment, which will potentially shift some of our consolidation product timing.

We also continue to be in a transitional period where the pool of available repayment customers, or folks who have been out of school for quite some time, for consolidation products continues to decrease. This will be offset by the growing numbers of graduates entering repayment period in the 2006 and 2007 timeframe.

We are excited about our prospects as the demand for education products continues to grow and we continue to position ourselves to offer a full set of solutions to students and their families.

With that, I'll conclude our formal remarks and be happy to answer any questions that you might have.

Ladies and gentlemen, if you wish to ask a question, please press star, followed by one, on your touch-tone telephone. If your question has been answered or you wish to withdraw your question, please press star, followed by two. Please press star, one, to begin. We will pause a moment to allow questions to queue.

Gentlemen, your first question comes from Beth Rosen with Merrill Lynch. Please proceed ma'am.

Hi guys. I just have a couple of questions. The first is on the fee income. You had discussed there were some higher fees. Was that on the consolidation loans sold or on the private loans sold? And like every quarter, Barry, can you break out the PLUS and Stafford loans on your portfolio to date?

And then give us a sense as to your overall where the consolidation growth is coming in this quarter, especially with the rate reset, what you're seeing from customers and the deferrals for higher rate?

Sure, yes, hey Beth. On the first point, I think we've talked the last couple of quarters about some new contracts we put in place in the mid 2004 timeframe, so I think some of the fees that you're seeing reflect all of those fee increases across all of our products. And there's catching up, particularly on a quarter-to-quarter comparison year-to-year.

On the Stafford and PLUS volume, this quarter we did right around $9 million in combined Stafford/PLUS. On a percentage basis it is huge year-over-year, we did about a million dollars in the first quarter of last year. Of course, that volume really will pick up as the 2005 academic year starts to take hold in the July to September timeframe.

The current customers in the first quarter of this year, as you know, a lot of the new grads for '05 are still in school in the first quarter and aren't eligible or yet aren't thinking about the fact they have to repay these loans, so the bulk of our customers in the first quarter are still folks who have been out of school for some time, which is what we anticipate.

As the second quarter and third quarter arrive with the increasing rates on July 1, we think it's going to go up close to 200 basis, so 170 to 200 basis points is kind of our guess. We are seeing the applications now for folks who are in school with anticipated graduation dates in May and June.

So we're starting to see some folks who have taken notice of the fact that if they lock in now, they can save themselves a couple of percentage points. Those accounts won't fund until late second quarter or potentially even into the fourth quarter if the Department follows their previous guidelines and allows people to apply prior to the reset date, and take advantage of their grace and still fund in November.

We haven't gotten that guidance yet. I do anticipate they will follow precedent and allow today's students to apply pre-July 1, but not fund until the fourth quarter. Did that answer all your questions, Beth?

Yes. Just on the last part, if that's the case, then you funded in the fourth quarter, but you book it in the third quarter?

Yes. We'll take an application and hold it for funding until their period expires, so we'll application the account in the second quarter, but not fund the account until the late third or into the fourth quarter depending upon their grace - their six-month grace end date.

Your next question comes from Moshe Orenbuch with CSFB. Please proceed.

Thanks. We noticed that your expenses were down pretty sharply for the fourth quarter and a little lower then we were expecting. With those four quarter accruals, is that kind of a new level? How should we think about that?

Yes. Some of that is really driven by activity. As you know, most of the fourth quarter is a period where we're trying to process as much volume as possible for the grace period customers that Barry talked about. So it's pretty much across the board, it was more driven by activity in the business.

Your next question comes from Steven Schultz with KBW. Please proceed.

Hi guys. Thanks. Just a follow-up, just so we understand on Beth's question. When you take an application in the second quarter and don't fund it until the fourth quarter for instance, you wouldn't recognize a fee until the fourth quarter, correct?

That's right Steve. We will maintain our accounting that we don't book any income until the loan funds.

Okay, great. And then, can you just talk I guess in terms of the net student loan spread on a core basis, backing out floor income?

Sure.

It looked like the net student loan spread was higher on a sequential basis, even though you did see some spread widening on the ABS funding and, you know, we had kind of - we had heard obviously about what had gone on in the auction rate market in March, but can you just talk about what was going on on the asset side to help support the higher core spreads?

Yes. That's a fair question Steven. Behind the numbers, we've talked about a decisioning model or optimizing our allocation. One thing that isn't readily transparent until you see the net spread numbers is that one of the criteria that we look at to determine the value of a loan is the coupon rate, the borrower's rate, and so therefore, at the margin we're able to add in slightly higher coupon loans.

So that's on the asset side. And then on the debt side, of course, we did have a pretty well-priced securitization in February.

Okay. And when you say higher coupon loans, you know, ...

The borrower's interest rate.

Right. No, no, I understand that. Okay. Are these typically then, they would be older loans?

Yes, that's exactly right.

Okay. And then just I guess following up on the gain on sale question that Beth had had, the margin, it looks like stayed closer to 5.4% than the 5%. Can you guys give any kind of update to the guidance on what you expect for a gain on sale margins over time?

Yes. I think we're still, you know, consistent with our past guidance of around 5%. It does fluctuate quarterly because, again, on the federal side, we obtain a fixed fee.

And if the balance tends to be up or down, that fixed fee expresses basis points, would be up or down, so there is some variability as the loans come across our desk. But I think on a go forward basis, we're still thinking 5% is the right number.

Then you would say that more of that 5.4% versus 5% is related to optimization than is related to the renegotiating contracts?

Yes. That's a fair - that's a fair assessment.

Your next question comes from Michael Cohen with Susquehanna Financial Group. Please proceed.

Hi. I have a few questions. One, can you talk about if you have an updated outlook for legislation and specifically, the risk of extended payment finding its way into reauthorization?

Yes, I'll give you my crystal ball to the extent that I can do that. I think it's usually about a 50/50 split in terms of reauthorization happening this year or 2006. We're on the 2006 side. If we had to bet in Vegas, that's where I'd put my money.

The reauthorization as it stands, we don't see any material impact on our business and net net we think is quite positive as written in Congressman Boehner’s markup, that's in the House Committee. The extended repayment option was scored. It scored very negatively.

We don't anticipate nor do we expect that will be part of the reauthorization process when it does happen. So we're not concerned about the extended repayment.

Right. Second question. Do you have a breakdown of the origination fees via sort of FFELP and private?

Yes, typically what we've done is given guidance that it's roughly a $0.05 number across all of our product lines if we get too more than that we're kind of getting into some confidentiality issues.

Okay. I mean specifically for lack of a better way of saying it. Can you start to put sort of the origination fees as well as the servicing fees and the advertising income into the press release that comes out as opposed to just through the text of the conference call in the future?

Yes, I don't see why we couldn't do that.

Not the product but just in total.

Yeah that's reasonable.

Well I mean just coming back - I mean in the past you've guys have given breakdowns of your gain on sale of revenue by product. At least I believe you have. Certainly in certain - you know I think I've found it in certain disclosures so I'm confused as to why you're not disclosing it today. I mean the self (ph) loan sales fees and the private loan sale fees?

Well I thought our guidance has already been around - you know it use to be 485 I think. Now we've pumped it up to 5 across all products lines and we can go back and revisit that certainly.

Just given that it's such an important part of your business and given the fact that private's going to be a growing part of your business I think it's-

Yeah, the only issue we've got is we do have one or I guess two, but one major outlook. I think there are some confidentiality issues with disclosing that fee but I'll certainly double check on that.

Right. Thank you very much.

Thank you.

Your next question comes from Daniel Welden with Jefferies & Company. Please proceed.

Hi. Can you talk a little bit more about the decision model and how that impacted the retained versus loans held percentage?

Yes. What we did is - I'll try not to get into too much detail here Dan. What we've noticed is that some borrowers whether intentionally or unintentionally may not include all of their eligible loans when they consolidate and rather than run the risk of selling that and then having additional disbursements to a loan what we did is we came up with what we thought the probability would be to - we identify those people, implement follow-up tactics, and then choose to retain them to try to capture some of these trailing disbursements. You know, like add on a loan that they've neglected. We actually got a better response than we had thought we would and therefore that's why we're up at the 57% retained level. I guess to err on the side of retaining loans is probably the better side. Now that we've got kind of validation on what the probability of getting the subsequent or additional disbursements that's why we're confident saying that it should return to a more normal basis.

Okay. Do you think you're going to follow the pattern of last year where you retained more in the beginning and sold more in the second half or is it going to be more even throughout the year this year?

Probably more even throughout the year. I know what you're asking because last year it was like 60% retained in Q1 but this had more to do with the model change than trying to parallel the prior year.

On the competitive side, are you seeing any intensified marketing by CIT or any other competitors in the consolidation space or was the first quarter similar to what you saw in the second half of last year?

I think the first quarter kind of - what we're seeing for the last three or four quarters quite frankly, not seeing any real new entrees into the market. We're seeing the same cast of characters if you will in the mailbox so we're not really seeing a whole lot of a different competitive position for consolidation space than we've seen for the last three or four quarters.

Your next question comes from Patricia McInerney with JPMorgan. Please proceed.

Hello, hi guys. I was just trying to kind of triangulate some of the decisioning things of what the fees are doing and what the Strat (ph) is doing and I guess it sounds like you’re retaining older loans and then - it sounds like to me the average balance of what you're selling in terms of the gain on sale piece is smaller than maybe what you’re retaining, and that's how you’re getting the higher fee at the fee specs. Is that kind of the right way to think about it and can that continue going forward?

Well again it depends on how the loans come across. Certainly on the federal side if we are within our contracts at the lower end of our balance commitments it would result in higher fees but the truth is if we go into the grace market and the balances seem to be higher than people who have been in repayment for quite some time. We think that will change. That's why we say it will come back to the $0.05 type of number.

Okay and then just secondly. If you could just talk about on marketing expense maybe for the year how much kind of generally you think you're going to need to spend or how much more than last year and then what quarterly what that might look like given the differences in rates going off this year versus last year?

In terms of expenses Patty I think generally we do on a full year basis do it expect expenses to probably be up in the high single digits. In terms of timing with the rate reset coming up toward the end of Q2 we expect to spend more money to make sure that as many customers as possible are aware of the benefits of applying before the end of the quarter. Conversely, you might see vis-a-vis Q3 of last year less spend on marketing because if those people if they hadn't applied before July 1 the next kind of decision moment for a customer will be when they get their coupon books in the fourth quarter so that those who chose not to act will probably try to go after them in the fourth quarter. Does that help?

Yes. The Q2 is the high point and 3Q is the low point -- is that roughly true?

Yes. It will be offset somewhat because with increased private add in the in school segment you know Q3 that's kind of the busy season for people going to school. So it'll see some offset there.

As a reminder ladies and gentlemen if you wish to ask a question please press star one on your touchtone telephone. This concludes the question and answer session. I would now like to turn the presentation back to Barry Morrow for closing remarks. Please proceed sir.

Okay well thank you everybody. Thanks for joining us this morning and taking the time to hear about our first quarter. Again, I think it was a solid quarter for Collegiate Funding Services and I'm looking forward to continuing to build on our platform and our success for the balance of this year and beyond. So everybody have a good day and we'll take to you next quarter.

Thank you for your participation in today's conference. This concludes our presentation. You may now disconnect. Have a nice day.