摩根大通 (JPM) 2005 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the third quarter 2005 Collegiate Funding Services earnings conference call.

My name is Colby 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, Chief Financial Officer.

Please proceed sir.

Great, thank you.

Good morning and thanks everybody for joining us on the Collegiate Funding Services third quarter 2005 Conference Call.

I am Kevin Landgraver, Chief Financial Officer of Collegiate Funding Services.

Before we hear from Barry Morrow, our President and Chief Executive Officer, I'd like to remind everyone that certain information on this call may contain forward looking statements as defined by Federal securities law.

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 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 the Collegiate Funding Services performance for this third quarter and then I will review the financial results and the finally we'll respond to your questions, Barry?

Thanks Kevin.

Good morning everyone and thanks for joining us today.

Collegiate Funding Service generated solid results for the third quarter of 2005 in spite of a few distractions.

In the quarter we further differentiated and broadened our offerings by initiating our loan origination platform in acquiring a leading college rebate program.

In addition, we expanded our distribution channels by signing new agreements with JP Morgan and Goldman Sachs as well as amended agreements with The Student Loan Corporation.

We've also resolved virtually all of the issues with the Department of Education regarding our EP status and we anticipate being redesignated before the end of the year.

I'll briefly recap some of our financial highlights and then comment on some of the other initiatives.

Total loan originations for the quarter totaled $1.3 billion, an 8% increase over last year, bringing total volume for the first 9 months of 2005 to $3.3 billion or a 14% increase, year-to-date.

Federal consolidation loans comprised $986 million of our total loan originations for the quarter and $2.9 billion, year-to-date, a 9% increase over last year.

In-school originations for federal and private loans grew 57% over last year to $292 million.

Year-to-date this number is up 74% at $441 million.

Last week we announced the addition of Paul Eber as president of our school services division.

Paul is a 22-year veteran of the industry and a former executive of Elm Resources and Educaid.

In this new position Paul will provide leadership for the campus business development teams.

In June we began marketing a new private loan product for our in school segment, which we will be retaining on our balance sheet.

We believe that retaining these loans in our portfolio benefits the company because it provides greater long-term value.

We are excited by this evolution in our private loan strategy including our in house platform for credit decisioning and underwriting and believe that this initiative will allow us to further leverage the potential growth of this market.

Total private loan origination volume was $268 million for the third quarter of 2005, an increase of 35% versus the same period a year ago.

CFS originated $435 million in private education loans for the 9 months, ending September 30, 2005 or an increase of 46% over last year.

Our student loan portfolio ended the quarter at $5.6 billion, an increase of 21% over the December 31, 2004.

And the servicing portfolio now stands at $12.1 billion, up 18% from the third quarter of last year.

Net income was $9.3 million, or $0.29 per diluted share.

This compares with 7.6 million or $0.25 per share for the third quarter of 2004.

This also includes one-time charges for refinancing our 2001 trust as previously disclosed and resolution of the EP issues with the Department of Education.

Without these one time charges, earnings would have been $0.35 per share.

We continue to expand our distribution channels by forming additional relationships with schools and other partners.

As of September 30th we had 1161 relationships, a net increase of 113 during the last 9 months.

Of particular note we recently announced the addition of new educational finance and debt management programs for the American Medical Association.

We recognize both the increasing demand for health care professionals and the substantial increase in the cost of education for medical students and are pleased to offer AMA members and employees access to customized education financing programs.

Also, during the quarter, we introduced an in school origination platform for federal loans that offers our college partners a seamless, paperless transaction for originating and dispersing federal loans.

We believe the additional capabilities of this new platform will allow us to further penetrate the in school channel for education financing.

CFS SunTech Servicing will also be able to offer this new service to other lenders and their customers.

We acquired the BabyMint college savings program, a loyalty rebate rewards program designed to assist students and families in saving and paying for college.

This acquisition provides an opportunity to differentiate our product while reaching out to the education credit consumer earlier.

We also entered into an agreement with GCO Education Loan Funding to provide loan servicing for federal consolidation loans.

This new relationship will add to our growing servicing portfolio and GCO selected CFS to provide its servicing based upon our technology and our position as one of the top services in the country.

In addition we renegotiated our agreement with The Student Loan Corporation.

Under the agreement The Student Loan Corporation has agreed to continue to purchase loans until of 2007, and also CFS will be able to retain a portion of production for servicing, unlike the previous arrangement.

In addition we have entered into an amended servicing agreement, which extends the current servicing contract until the end of 2007.

Adding to all the distribution channels and reaffirming the attractiveness of these assets we entered into separate loan purchase agreements with JP Morgan Chase Bank and the Goldman Sachs Group.

Under the agreement with JP Morgan, the bank will purchase $500 million of FFELP consolidation loans over the next 12 months.

Under the Goldman agreement, Goldman purchased approximately $100 million in loans previously originated by CFS and both of these agreements include life of loan servicing via us or CFS SunTech subsidiary.

These agreements were put in place very late in the quarter and we, as a hedge, ended up selling a bit more of our production than we may have it had been consummated earlier.

In the fourth quarter we anticipate being more in line with our year-to-date numbers or approximately 55% of our production sold versus the 61% we sold this quarter.

As I say, we had a very strong quarter, we put in place some very important growth platforms for the future.

I'll now turn the call back to Kevin to talk about the financials in detail.

All right.

Thanks Barry.

Good morning again.

I would now like to provide more detail behind the results that Barry briefly outlined, including more information on our origination volume, the loan portfolio, income and expenses and other finance topics.

Turning first to loan volume.

Our total originations for the third quarter of 2005, were $1.3 billion.

This is an increase of 8% from the year ago period.

As Barry noted, our private loan volume continued to climb.

We sold $216.4 million of third party, private loan applications and added $51.9 million of CFS loan volume to the balance sheet.

In addition, we've been focusing on generating more in-school volume.

In our third quarter originations included $291.9 million of in-school loans which consisted of both private and FFELP loans, up from $185.9 million a year earlier.

Federal consolidation loan originations totaled $986 million for the third quarter of 2005, or about 3% higher than the year ago period.

We retained approximately 39% of our FFELP application originations last quarter and sold 61%.

Year-to-date we're at 54% sold and 46% retained.

Now, let me talk about revenue.

Net revenue for the third quarter of 2005 was $61.7 million, up approximately 4% compared with $59.1 million in the same period a year ago.

Net interest income before provision for loan losses was $18.8 million, up 14%, compared with $16.5 million in the third quarter of '04.

This improvement reflects growth in earning assets.

We had $874,000 of floor income in the third quarter of 2005.

Third quarter 2005 fee income was $44.4 million, up 2% from $43.3 million in the year ago period.

Loan application and whole loan sales accounted for $40.2 million of the fee income.

The balance of fee income came from servicing fees and advertising income from Y2M's publishing activities.

Turning now to expenses.

Total operating expenses before swap and derivative activities were $42.5 million, a decrease of 5% compared with $44.6 million in the third quarter of 2004.

Salary and benefits expenses increased to $18.4 million, a 6% change from the year ago period.

Marketing and mailing expenses were $15.6 million, down 11% compared with $17.5 million in the third quarter of '04.

This decrease reflects controlled federal consolidation loan marketing activity following the July 1 rate increase.

Other SG&A expenses declined to $8.5 million, down 13% compared with $9.7 million in the third quarter of 2004.

During the quarter, expenses benefited from a credit of $1.3 million related to a reversal of most of the $1.6 million reserve we took in the second quarter of this year, due to the change in our exceptional performer status.

During the third quarter 2005, the net effect of swap interest and derivative and investment mark-to-market valuations was income of $300,000 compared to an expense of $900,000 in the same period a year ago.

Also, as we had noted on last quarter's conference call, there was a $4.3 million charge in the third quarter for debt extinguishments related to auction rate certificates that were replaced with a portion of the proceeds from an offering of floating rate debt.

As you can see from this quarter's margin, we are already realizing benefits from this decision.

Finally, there was no accretion of dividends on preferred shares in the third quarter of 2005 versus $507,000 in the third quarter of 2004.

Net income for the third quarter of 2005 was $9.3 million, or $0.29 per share on approximately 32.3 million diluted weighted average shares, versus net income of $7.6 million or $0.25 per share on approximately 30.7 million diluted weighted average shares in the third quarter of 2004.

We provide year-to-date information in the press release and most of the factors that I discussed influencing third quarter results are also applicable to the year-to-date results.

In summary, Collegiate Funding Services has continued to increase our origination volume and our loan portfolio while constantly seeking to diversify our revenue streams.

With that I'll turn the call back to Barry.

Thanks Kevin.

As I said earlier, despite some temporary points of frustration, we've shown great progress in 2005.

The point of frustration that continues for me, as I'm sure it does for you, is that I believe that we continue to be undervalued.

When you look at some of the recent transactions that have occurred and compare this to CFS I continue to be perplexed.

Especially when you consider that we continue to be one of only a few major players that have totally integrated platforms in the education credit market.

We've shown our ability to produce both private and federal loan volume, we've diversified our product offerings and our distribution channels.

We've solidified and diversified our liquidity outlets and we've added some $2 billion of federally guaranteed loans for our balance sheet since going public last July.

I would like to publicly thank all the CFS associates for their continued hard work and commitment in providing education solutions and with that I'll conclude the formal discussion and open the call up for questions.

(Operator Instructions) Your first question comes from the line of Beth Rosen with Merrill Lynch.

Please proceed.

Hi, guys, I just wanted - had a couple questions on your loan volume, sort of what especially on the strategy for retaining what your strategy is going forward.

I know fourth quarter you said 55% what we're seeing for '06.

And then you mentioned on the call that the credit, private loans you're holding are mostly in-school, and kind of what the credit metrics might be between the direct to consumer and the in-school private loan origination?

Beth, this is Kevin, let me try to work backwards.

The metrics on the private loans, most of the in-school volume is the balance sheet product as well as what's being sold and there's very little repayment volume.

Is that your question?

Well, I just want to know if there's any difference in sort of the underwriting or the quality, FICO scores or any kind of credit indication from private loans that you do through your in-school channels as opposed to if you do private loans, just direct marketing, solicitations that have no ties to any schools, unless I was misreading what you said on the call.

Beth, this is Barry, let me try to clarify that.

Currently the CFS product that we market is just direct to consumer, we don't have a ...

Oh, okay.

...product for cert - what we call a certified, which is the school based.

We do a certified product through our subsidiary, International Education Financing Corporation and I think we've discussed this previously, when we acquired them they had some commitments to some liquidity outlets, those loans now go to those outlets through the middle part of next year.

And then we'll look at changing those relationships.

We are in development of a certified product that will have the CFS product in the school channel.

That will probably roll out first quarter of '06.

Okay, thank you.

Sorry, I got confused by in-school, the term in-school.

That's, that's fine.

Your next question comes from the line of Stephen Schulz with KBW.

Please proceed.

Hi, thanks guys, just actually one quick follow up on that, on IEFC, this is the first quarter that you had kind of a full quarter impact of IEFC coming in.

Can you talk about the impact from IEFC on private loan originations and then also on the gain on sale margin, given those contracts that are on through the middle of next year?

Yes, Stephen, this is Barry, how you doing?

For the quarter, IEFC on the in school certified product did about $58 million.

The margin on those loans are relatively low, Kevin they're...?

Around 150.

About 150 for those loans because of the current commitments that they have in place.

Again, those commitments will roll off in the middle part of next year and we'll look to either up that substantially or retain that asset on our balance sheet.

Okay, great.

Thank you and then secondly on the pipeline of grace consolidations from the fourth, or for the fourth quarter that you guys have been holding on to since the second quarter, pre-July reset.

Any indication on kind of how much volume you guys are sitting on that you expect to fund in the fourth quarter from grace?

Yes, actually our grace pipeline year over year is up some 60% and we look for total originations in the fourth quarter to be pretty much in line with the third quarter numbers.

The bulk of that for fed con coming from the grace segment, people who are rolling out for repayment in November.

Okay, so when you say you expect total originations for 4Q on the consolidation side to be in line with 3Q?

Yes, uh huh.

That's correct.

Great, thanks a lot.

Your next question comes from the line of Dan Weldon with Jefferies.

Please proceed.

Hi guys, good quarter.

Few things, first of all, on the core margin, continues to be pretty strong.

Is this a reflection of fewer people getting the benefits, rate reduction benefits and what's your outlook there?

Okay Dan, this is Kevin.

The out - well, let me walk through the question here.

We're updating our disclosure on our margin analysis to include the effect of borrower benefits and as you'll see it's not borrower benefits that are driving the margin expansion.

I think for the quarter there's probably 3 factors, two of which we can't count on, one of which we can.

For example one driver was the fact that basically the ratio of earning assets to debt increased a little bit.

Second is that our LIBOR based debt priced towards the beginning of the quarter but our yield is driven off of the average CP, so the rising rate environment actually helped us a little bit in this quarter.

So I think those two, those are nice to have.

Embedded within the margin expansion though is the benefit of lower cost of funds by refinancing out of the auction rate market.

You may recall that that has about a 25 basis point broker-dealer fee and in our financials that's, we were taking that out of the loan yield.

I don't know if that's too much information but going forward we do expect the margin to be up a little bit.

I think this quarter we had some timing things that benefited us as well.

Great, that's very helpful.

One other question, on this servicing platform, giving all the changes in loan sale arrangements and the new in school platform, what is your outlook for the servicing balance growth versus prior to these changes?

Dan this is Barry.

Well, with the new - when you kind of take it I guess by channel or by customer, with GCO, which I mentioned we signed the contract with them this quarter.

They'll probably provide us with, it will depend a little bit on their production, but we're expecting between $300 to 500 million of the servicing volume next year from that channel.

Of course we'll start to add to SunTech now that we can retain, I believe, its 20% of our production for STU for servicing, we'll start to put that on our platform which we could not do on the previous agreement.

And in terms of the in-school platform, that's really going to be driven by our CFS school channels and again, I think in terms of ramp, that's a 2 to 3 year as I've talked about in the past to ramp it up to any considerable size, so we are looking for some growth in the servicing platform but the immediate growth will be more from the 2 factors I mentioned, the STU contract, the GCO contract.

We're talking to a couple of other parties about servicing contracts and of course continued growth and CFS, particularly in private loans.

Barry, one other point I think that might be helpful for Dan's question is that as we ventured into a new liquidity agreements for the federal consolidation loans, we've been focused on getting life of loan servicing agreements as opposed to 2 or 3 year term agreements.

So both the spot sale that we completed in the third quarter as well as the forward flow agreement with JP Morgan includes life of loan servicing, and so therefore that should grow as we sell loans to third parties.

Got it.

Thanks.

Your next question comes from the line of Joe Halpern of Halpern Capital.

Please proceed.

Hi guys, nice quarter.

Hi Joe.

Just real quick question on consolidation volume, can you give us, I guess a look into what application volumes looked like recently compared to year ago period and I guess what your outlook is on the market in general and I guess whether what you're seeing relative to obviously this was a pretty big year, so what you're seeing for I guess the next 12 months or so.

Right, if you look at it from the total application flow this year versus last year, I think we're running, I think slightly below for overall applications.

In terms of the grace pipeline, the grace applications continue to increase as I mentioned, they're about 60% of our pipeline, and going forward, given the July 1 rate this year reset, caused some artificial inflation in terms of demand.

I think we'll see more normalization as we've seen perhaps prior, in prior years like 2003 and 4.

Overall market again;

I think we've talked about this in terms of the repayment part of the market.

We believe that continues to decrease as people decide to finally go ahead and consolidate.

But again we've really been focused on the new pipeline, or the grace pipeline, new graduates, which we believe is the growth part.

There's always going to be some people that put it off and consolidate 2 or 3 years after they're out.

But for the most part we've seen a repayment population as we've discussed previously decline and the build market is in the new graduate market.

Okay thank you.

(Operator Instructions) Your next question comes from the line of Beth Rosen with Merrill Lynch.

Hey guys, I just had 2 follow-ups, can you tell me what the fee income just on the consolidation FFELP portfolio was and then if you have any thoughts or updates on reauthorization.

Yeah, Beth this is Kevin, on the federal consolidation, it was higher than what you're seeing for the total and that's primarily the effect of your first question, which is the margins on the private in-school loans that are sold as a marketing agent.

We - for the quarter we were right around 450 basis points for the federal consolidation volume that we sold.

Okay and of the loans that you sold how much of that, round about, was through forward agreements and then that was - because you had said that you had maybe sold more because these agreements weren't in place.

Most of it was through forward flow Beth, the only spot sale we did was a Goldman Sach's deal which is $100 million, the rest of it was through forward agreements.

Okay, and reauthorization?

Reauthorization, you might have seen some news lately, it's getting even more bizarre than it has been in the past.

We're still of the mind that nothing will happen with reauthorization until next year and quite frankly some of the proposals that have come out the last couple of days, I guess I would characterize perhaps as a little bit of political grandstanding.

We don't think any of the recent proposals are going to go anywhere, both because of the split between not only the Republicans and the Democrats but also the split even within the Republican party, between the moderate part of the party and the conservatives.

So it leaves a little bit of grandstanding going on.

We have been down on the Hill the last several weeks but again we don't think any of these recent proposals really have a chance of going anywhere quite frankly.

Thank you.

Your next question comes from the line of Vincent Daniel with Front Point.

Please proceed.

Hey good morning guys, Beth actually just asked my question on the reauthorization.

Thanks.

Okay Vincent.

Your next question comes from the line of Stephen Schulz with KBW.

Please proceed.

Thanks for taking the follow up you guys.

Can you talk - on the in-school origination platform that you mentioned that you put in place this quarter, can you just talk about kind of what this allows you to do that you couldn't do before and you know, a timeline of when you expect to actually get things going on actually disbursing over that system.

Yes, Stephen, this is Barry.

Yes, I mean bottom line is the thumbtack servicing platform prior to us putting a front end disbursement platform did not have the ability to disperse in school federal loan staffing plus.

So now we've got the ability to do that, the platform that we're using is open architected, that simply means it can talk to the Elm Network, which is a standard network used in the business as well as the common line standards that are employed and gives us the ability to go into a school and rather than using somebody else's platform, we can use our own platform and talk to the school about how we have seamless and life of the loan processing for their students which is a very attractive position to be in on the school channel.

We are disbursing loans through that platform as we speak, but again, in terms of ramp, as I've talked about before, the school channel is a slow ramp but we have actually processed loans through that system in a beta test mode and now rolled it out and we'll be offering that to our school partners for next academic year.

Great thanks a lot.

Sure Steve.

(Operator Instructions) At this time there are no further questions appearing in the queue.

All right, great, everyone thank you for joining us today and again, I think we had a good quarter despite some of the uncertainties that we had, but I think we've addressed those and the future looks, in my mind, very, very positive for CFS.

So have a good day and we'll talk to you next quarter.

Thank you for your participation in today's conference, this concludes the presentation.

You may now disconnect.

Good day.