MS Financial Inc. has become the latest subprime auto lender to run off the road.
The Jackson, Miss., company on Monday reported second-quarter earnings of $142,000, or 1 cent a share, 4 cents below the consensus estimate. It also announced, the same day, the resignation of E. Peter Healey, its chief financial officer.
"When you have a finance company not doing well and the CFO leaves, there's always reason to be concerned," said analyst Peter Tuz of Morgan Keegan in Memphis.
Mr. Healey could not be reached for comment. MS Financial said it had not decided whether he would be replaced.
The company, which has $150 million of managed loans, attributed its problems "primarily to losses and delinquencies that were higher than comparable periods" of 1995. MS Financial's net chargeoff ratio of 1.10% had jumped from 0.69% in the year-earlier quarter, while 30-day delinquencies rose to 8.3% from 6.90%.
"The company continues to experience the same negative economic trends that are affecting other consumer finance companies; that's fairly clear," said vice chairman and CEO Philip J. Hubbuch Jr.
Mr. Hubbuch declined to discuss MS Financial's earnings in any greater detail. But he did say, "There's no direct relationship whatsoever" between the lower-than-expected profit and Mr. Healey's departure.
MS Financial's problems did not catch Wall Street by surprise. The company had announced July 9 that "earnings for the remainder of 1996 will likely be less than analysts' estimates" due to higher losses and delinquencies.
The situation at MS Financial has been replicated at several other companies that specialize in making auto loans to customers with impaired credit. Those that experienced significant crackups in recent quarters include TFC Enterprises Inc.; Eagle Finance Corp.; General Acceptance Corp., and Monaco Finance Inc.
"What you're starting to see is differentiation among the players," said Kevin D. Spinner, an analyst at Keefe, Bruyette & Woods Inc. "Some of the operations are stronger than others."
MS Financial, which went public in July 1995 at $12 a share, was trading recently at just under $5.
"This is a business where, if you've been in the wrong stocks, you've gotten killed," said Joseph A. Jolson of Montgomery Securities. "Over half the companies that went public in 1995 are way below their IPO price because they've materially screwed up."
Inspired by the success of Mercury Finance, the industry's largest and best-established player, a wave of subprime auto lenders tapped the markets for capital in 1995. But many, analysts say, grew too fast in order to meet earnings projections.
Mercury, meanwhile, throttled back on its lending last year, slowing earnings growth but helping to preserve credit quality. Mercury's chargeoffs and delinquency ratios have been trending downward since last year's fourth quarter.
"If people have been critical of our receivables growth, we think they should also be complimentary of us for not falling prey to some reckless pricing," said Mercury senior vice president and treasurer James A. Doyle. "Credit quality is a company-by-company issue and not an industry problem."
Did MS Financial grow too fast?
A recent analysis by Natwest Securities Corp. shows that the company reported 38% loan growth from the first quarter of 1995 to this year's first quarter. By contrast, Mercury's originations fell 10% during the same period.
On the other hand, MS Financial's origination growth was modest compared to that of many other subprime lenders in the survey.
In its July 9 press release, MS Financial said it had instituted several measures to improve performance. Most importantly, the company adopted the standard industry practice of buying its loans at a discount rather than insuring them with its own subsidiary, MS Casualty Insurance Co.