Money
Store 2Q
| Money
Store 2Q
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| (FOOL
CONFERENCE
CALL
SYNOPSIS)* By Debora Tidwell (MF Debit) The Money Store UNION CITY, Ca., July 23, 1996/FOOLWIRE/ --- The Money Store released Q2 1996 results this morning. Q2 earnings were up 76% to $19 million which is a company record not only for Q2 but overall. Earnings per share were up 52% to $0.32, beating analyst estimates of $0.29 per share by $0.03. Revenues of $178 million were up 58%.
Q2 was a very strong quarter. The company showed very strong topline growth, initiated by strong volume which led to large securitizations and, overall, produced a 47% increase in the company's gain on sale income. Also interesting is that the company's finance and fee income was up significantly over Q2 1995 and, for the first time, represented more than 35% of their revenues. Loan volume overall was up 56% and totalled $1.33 billion across all divisions -- another company record. The originations in all 4 divisions were healthy and offset a slight reduction in home equity spreads to the low end of what most analysts are projecting. The company is also pleased with the delinquency and charge-offs remaining well within the expected parameters.
The company highlighted 4 milestones accomplished in Q2: (1) it was their first billion dollar home equity quarter which was 46% over 1995 in loan originations, (2) it was the first quarter for $100 million in auto production, (3) for the first time their outstanding service portfolio surpassed the $10 billion mark (up 44% to $10.3 billion at the end of Q2), and (4) they are now conducting business in all 50 states for the first time.
Also in the quarter, the company saw their government guarantee divisions performing well, coming back from the cap of 1995 in the SPA division. They saw originations up 86%, an indication that they finally burned off the lag from the smaller loans from last year. The pipeline has matured and they are starting to see the production out of SPA. Student lending was up 21% to $50 million. This is typically their slowest quarter in student lending (Q2), but it was the best Q2 in their history.
HOME IMPROVEMENT LENDING
Home improvement continues to grow at a steep rate for them. They did about $141 million in Q2. They are on track to do well over $400 million in home improvement volume for the year. This compares to last year's $270 million in home improvement volume. This is one of their initiatives to diversify the way in which they source the business. About 3/4 of the business in home improvement is sourced through contractors or dealers and over Q2 last year they have tripled the number of dealers that they are now doing business with.
They expect excellent growth as the markets they have entered in over the last few months mature. An analysis of their portfolio shows that offices that have been established in the last 6 months produce about one quarter of the volume of home improvement markets that have been open for at least 18 months. So, as the markets mature, they see a strong growth in volume. Over the last few months, Chicago has begun to come into its own as a good market, but they haven't really begun to tap the potential of the Midwest in home improvement. They see strong markets coming such as St. Louis, Kansas City, Milwaukee, and Indianapolis and they have a unique opportunity to gain market share in home improvement lending.
Reports suggest overall that the home improvement business is a $100 billion per year business last year and is expected to go as high as $200 billion by the year 2000. Today roughly $45 billion of the existing home improvement activity is being financed and only 3 national lenders, including the Money Store, account for about 3% of the market. So, it is a very fragmented, large market with good growth, but is very hard for any one competitor to grab a lot of it because it is fragmented and originated in a way that is not easy for others to pick off. This is another case where the Money Store feels they can benefit from their brand franchise and from their infrastructure. They have found that the contractors know and identify with the name "The Money Store" and with company spokesman Jim Palmer and they believe they have been very successful gaining market share for that reason.
Another exciting area for them is the direct marketing and direct mail area. They have increased their spending dramatically over 1995 levels to almost 5 times what they were spending in 1995. It is more than they expected to spend this year but it is paying off and they are becoming better at it the more they do it and they find that they are leveraging off of their TV advertising and this is ultimately lowering their origination costs. They have indicated in the past that direct marketing was running about 2/3 the cost of the TV originated loan, so they will continue to address this market. They have also, over the last year, brought in some people in database marketing from the credit card and insurance industries and believe that as they go forward they will become more and more sophisticated at their database and direct marketing activities.
The third area in the home equity area that has been a bit of a laggard is their HELOC (home equity line of credit) product. They expected to roll this out in Q2 and did not. They are currently geared for September or October at the very latest and it is running later than expected because of the complexity of systems and outside vendors that were required for them to introduce the product.
They have made the decision that they are going to take a little more time to roll it out properly. They continue to feel very optimistic about the future contribution of this product. With a $10 billion outstanding portfolio, they think the HELOC will be able to tag onto some of the existing portfolio, rewrite some of the existing loans with it. They know there is some spillage here, they are getting a great number of phone calls each month that are going unsatisfied. Roughly 95% of their new callers each month are not receiving a Money Store Product. They know from surveying those customers that a fair percentage of them would like the HELOC product.
Their fourth initiative is continuing to write a limited amount of incrementally deeper paper. They have expanded their credit matrix. They tested it in Q1, they are expanding it and continuing to go forward with the program. These are slightly more tarnished credits, but not what they would call an equity loan or a pure collateral loan. This is not a D loan, but more of a C loan.
The reason they decided to do this is that they had those 200,000 new calls coming in each month and there is a tremendous amount of spillage on their part -- callers coming in who they are just not offering a loan to for one reason or another. One of those reasons is they want a HELOC. Another reason is that they are a C customer and not a B. So, they are incrementally going deeper and their matrix will get slightly better yields.
They probably will not have higher charge-offs because they will have better loan-to-value. It eventually will cause a tick up in delinquencies, but more significantly it will mean additional earnings for them. They consider this to be low-hanging fruit because it is business that is coming in the door, so they've paid for the origination cost, and they are gradually looking at this paper and watching it very closely in terms of its performance. But they think it will be a strong driver going forward.
SBA LENDING
Due to the natural lag in the pipeline, their average loan size has just now recovered to where it was before the government put a cap on SBA lending in 1995. Additionally, the unit count in SBA lending is growing very well. They are up 60% for the first 6 months.
Their largest growth areas in the SBA lending area have been in the franchise lending area and the national products group which is their centralized marketing and processing operation which they created in 1995. The purpose of centralized marketing is to use affinity marketing and national marketing initiatives that really are not suitable to be rolled out through a decentralized network of 100 business development officers.
The national products group had enabled them to roll out products more quickly and establish new markets more quickly. This strategy has already begun to rationalize their cost structure. In terms of cost, the SBA division deficiency is way up. It is, for them, a model of productivity increases that they hope to begin seeing in home equity.
The headcount overall in SBA lending is down 7% and the number of branch offices is down 10% just since the end of the year of 1995. They are very pleased with both efficiency and growth in volumes and profitability in their SBA division.
STUDENT LOANS
The student loan company Educate has been greatly centralized since its inception and, this year they added their first new office in over two year in student lending. The government's direct lending program continues to raise their targets each year. Although they don't hit their targets, they have continued to raise them. The company is pleased to say that in 1996, for the first half they are up about 17% over 1995. And, over the last two years, since direct lending was implemented, they are up 35%. They are one of the few student lenders in the country that has seen volumes grow and they feel very positive about the trends in the student loans business.
AUTO FINANCE
In auto finance, at the end of Q2 they had opened 39 offices. Five of those were opened in the month of June alone. They are continuing their pace of opening branch offices. For them, this is very quick. When they looked at this business in early 1995 they saw a tremendous gap in the market in B lending. There were a lot of C and D lenders and A lenders, but they saw a tremendous gap nationally in B lenders. They have had essentially 2 years to own this market or achieve a dominant share in the B market. Their goal was to be in major metropolitan areas within two years.
Because of the types of credit they were writing, they felt very comfortable and continue to feel very comfortable with credit quality, delinquency, and write-offs and believe that they can take a dominant position in a short time. As a result, they now have 39 offices open. Thirteen were open in the first half of this year.
Their June run rate is $36 million which is ahead of their projections for the year in terms of loan originations. Like in the home improvement business, as the markets mature they start to see a tremendous ramp-up in volume. Markets that are 18 months old and older are doing 4 times the volume of branches that are open for less than 6 months. One third of the 39 offices have been open less than six months, so they are starting to see significant growth in terms of same sales by branch. The pace will slow somewhat in the second half of the year in terms of new office openings, but they expect to have a total of about 45 auto branches by the end of 1996.
CREDIT QUALITY AND LOOKING FORWARD
The company continued to add to their reserves in 1996 and specifically in Q2 both in absolute and in relative terms. The June 30th allowance for reserves was at 2.35 of their at-risk portfolio which is the highest in their company history. The allowance represents more than 5 times their charge-offs experirenced on an annualized basis. In other words, they have more than 5.2 years worth of reserves at today's level of write-offs. They are very pleased that they have been able to maintain this charge-off multiple of 5 times annual write-off even as they are growing their originations at a very quick pace.
They are obviously very much aware of the credit issues that are manifest but they would like people to keep in mind 4 things that they have been saying for some time.
First, they do expect delinquency to be in the 5-6% range this year, moving toward 6% on the home equity side as the year progresses. It is the function of a maturing portfolio and where we are in the economic cycle. But they are very comfortable overall with the level of delinquency and the trends.
Second, they want to remind everyone that their loans are primarily collateralized by real estate or are government guaranteed as in the student loan and SBA businesses.
Third, they see the trend in delinquency nationally which is in the credit card side as a driver for them in terms of new business in home equity loans. They believe that home equity loans are the natural exit strategy for homeowners that have accumulated a lot of unsecured and high interest credit card debt.
Fourth, even during the last Recession when they had lower reserves, less geographic diversity, very few first mortgages on their balance sheet, they had enough cushion that they didn't have to take a hit to earnings due to charge-offs. Their goal, as they approach the next Recession, is to maintain that record. They feel that with their current level of reserves, a much greater geographic spread of their portfolio, a higher percentage of first mortgages, that they are in strong shape for the next dip in the economic cycle.
They currently, in terms of the balance sheet, have almost $400 million in shareholders equity and they are going to continue to look for ways to finance their growth more profitably and to lower their cost of capital going forward.
They believe that, although incrementally down, the percentage of their expenses to their outstanding portfolio is too high for the long term. The principal reasons are the growth in auto branches, home improvement expansion, and finally the increased costs on the front end in direct marketing. They expect to continue to become more efficient, but their principal focus has been to get a beachead in auto and home improvement and they are growing very quickly overall as a company.
They are pleased with the stock offering in March and the new strength of their balance sheet which should position them to lower the cost of capital ultimately. Today, with the recent weakness in the overall market and concerns in the market in general about credit quality, they have seen their multiple versus the consensus down now to about 13.5 times 1997 earnings. They think the company is fundamentally the same company it was three months ago when it was trading at a much higher multiple. They are very pleased with the direction of the company and the results of Q2. * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. | |
Copyright 1996,
The Motley Fool |