Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Paul Sinsheimer - President & Chief Executive Officer

Steve Groth - Chief Financial Officer

David Hamm – Controller

Analysts

Sameer Gokhale - Keefe, Bruyette & Woods

John Hecht - JMP Securities

Brian Hogan - Piper Jaffray

Scott Valentin - FBR Capital Markets

Financial Federal Corporation (FIF) F2Q09 Earnings Call March 4, 2009 11:00 AM ET

Operator

Good day, ladies and gentlemen and welcome to the Q2, 2009 Financial Federal Corporation earnings conference call. My name is Becky 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 this conference. (Operator Instructions)

This call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements. Readers are referred to the most recent reports on Forms 10-K and 10-Q filed by the company with the Securities and Exchange Commission that identifies such risks and uncertainties.

I would now like to turn the presentation over to your host for today’s call Mr. Paul Sinsheimer, President of Financial Federal Corporation. Please proceed.

Paul Sinsheimer

Good morning. Thank you for attending our earnings conference call for the second quarter ending January 31, ’09. I’m joined today by Steve Groth, our CFO and David Hamm, our Controller. I will briefly discuss our second quarter results and business strengths, I’ll then ask Steve to discuss liquidity and finally we will take question from participants.

Net income for the second quarter ending January 31, was $12.3 million, 2% lower than in the second quarter of 2008. Diluting earnings per share were $0.49 for the quarter $0.02 higher than last quarter and 4% lower than the second quarter of ‘08. Results for the second quarter include a $1 million after tax gain on retirement of debt from the repurchase of $42.3 million of our convertible debentures, without this gain net income decreased by 10% to $11.3 million and diluted earnings per share decreased by 12% to $0.45.

Originations for the quarter were $126 million compared to $225 million last quarter and $225 million in the second quarter of 2008. As a result of the lower level of originations finance receivables fell by 4% during the quarter to $1.8 billion. The yield for the quarter was 8.72%, down from 8.89% last quarter and 9.23% in the second quarter 0f ’08.

Cost of debt was 3.78% down from 4.26% last quarter and 5% in the second quarter of ’08. The net interest margin increased to 5.94% from 5.71% in the last quarter and 5.34% in the second quarter of ’08.

Expenses increased to $7.3 million to $6.9 million in the second quarter of ’08 and $7.2 million from last quarter. Expense ratio for the quarter was 1.55% and the efficiency ratio was 26.1%. Put all together this resulted in 11.2% return on equity and an ending 3.01 debt to equity ratio. For the first half of fiscal ’09, net income was $24 million, a 5% decrease from the same period last year and diluted earnings per share also decreased by 5% to $0.96 from $1.01.

The asset quality net charge offs were $2 million for the second quarter compared to $1.4 million last quarter and $700,000 in the second quarter of ’08. The provision for credit losses were $2.1 million compared to $1.4 million recorded last quarter and $800,000 recorded in the second quarter of fiscal 2008. The allowance for credit losses was 1.38 at the end of January, up from 1.16 at January 31, 2008.

Non-accrual receivables were 2.2% of total receivables compared to 1.55% at second quarter end of fiscal 2008. Delinquencies were 1.47% compared to 1.2%. Repossessed equipment was at 0.75% compared to 0.27%.

I would now like to turn the conversation over to Steve.

Steven Groth

Thanks Paul. If you hadn’t see it, I would like to report that fixed ratings we earned are BBB+, F2 ratings earlier this week and maintained their stable outlook. This is significant for a finance company obviously, especially during these difficult times. Our liquidity continued to increase during the quarter, reaching $429 million as receivables continued to fall and no debt matured.

We repurchased our portion of our convertible bonds during the quarter recognizing a $1.5 million pre-tax gain and we have ample liquidity to repay the remaining $132.7 million on April 15 to put date. We continue to explore new financing opportunities and with little distinct facilities. Paul

Paul Sinsheimer

Given the state of the economy, as well as the capital market I feel our second quarter performance was quiet remarkable. We delivered a 10% ROE with leverage declining to three to one.

From my perspective, Financial Federal has one of the strongest balance sheets in the commercial finance sector. Our tangible capital-to-assets ratio now stands at 24% and should increase as we continue to contract. I expect operating statistics to continue to trend negatively and as I’ve said many times before, no matter how bad it may get I strongly believe that FFC will out perform its peers.

At this time, I would like to open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Sameer Gokhale -Keefe, Bruyette & Woods. Please proceed.

Sameer Gokhale - Keefe, Bruyette & Woods

Thank you. I just had a question again any about your expected impact of the stimulus bill, now that’s been passed. The origination were little bit light this quarter, do you expect more of a ramp up in that in coming quarters based on what is in the stimulus bill for infrastructure spending?

Paul Sinsheimer

Thanks for the question, Sameer. It’s a fair question. I’m not sure I know what to expect out of what has been recently announced in Washington. Things seems to be changing quickly, it doesn’t appear that the capital markets at least have embraced what the administration has announced that they’re going to do and I would strongly believe whether I was talking about Financial Federal or for that matter any business. While this negative sentiment continues to overwhelm us it’s hard to be positive about much including our business.

Sameer Gokhale - Keefe, Bruyette & Woods

Okay and then, as far as the TALF program that was recently announced, would you try to fund some of your originations through that just to test the waters a little bit or at this time are you not interested in using the TALF for funding at all.

Paul Sinsheimer

This is recent news that we just learned about yesterday. It’s almost a little premature for me to attempting answer that other than to shoot from the hip and tell you of course we are interested in it, but like most of these types of programs the devil will be in the details and until we see the details I can’t give you a clear sense of our direction. Obviously we are encouraged by that announcement, but we don’t know enough about that yet to respond.

Sameer Gokhale - Keefe, Bruyette & Woods

Okay. That’s fair enough and I guess my last question and I’ll hop back into the queue. I know you talked previously about looking potentially buying a bank and you’re evaluating that pretty seriously. I was just wondering if there is any more clarity on that or are you any closer to buying a bank to hit your liquidity further bolster that or is that something that’s just been shelved for now?

Paul Sinsheimer

Well, obviously that is among the items we have discussed in the past. I will say that we are continuing down the path exploring a deposit funding mechanism to provide liquidity to the company. I don’t have anything meaningful to report to you on that effort other than to tell you that it is moving forward and obviously when we do have something to tell you, we will report it.

Sameer Gokhale - Keefe, Bruyette & Woods

Is there an issue of you not finding banks at the right price or you are not finding banks at the right size. Can you us some additional insight into how you are thinking about that?

Steve Groth

Sameer, if you look at our liquidity profile today and the selection on asset growth we don’t need another source but we are looking at it as an alternative down the road and every week something new comes out in terms of programs, in terms of opportunities, so this TALF is very promising, we want to see a little more detail on it, but we continue to look at the bank structure. At some in point time you need to select a target and move forward the application, but we are perceiving, its not like there enormous opportunities out there.

Sameer Gokhale - Keefe, Bruyette & Woods

Okay. Fair enough. Thank you.

Operator

Your next question comes from John Hecht - JMP Securities.

John Hecht – JMP Securities

Good morning and thanks for taking my questions. A little bit of follow-up from Sameer’s question, I guess related to the origination environment. So obviously, it’s a little too early to understand how the stimulus program might work, but can you tell us the conditions of the competitive market place or may be at a segment level where you see opportunity? Can you give us a sense for where run rate might go at this point?

Paul Sinsheimer

Well that’s a great question John. I’ve said many times recently the visibility on many funds is limited. I will tell you that the competitive environment is tilted in our favor today, I never going to report to you that it’s easy, but it is easier today than it was a couple of quarters ago.

We’ve seen retrenchments from competitors; we’ve seen disappearance of competitors, but the size of the overall pie is shrinking faster than our competitors are disappearing or retrenching and it is picking up pace not only in our business, but as I read the newspapers I believe throughout the entire economy.

People are very uncertain of the future. They themselves are universal potential clients; our concerned is all of this all on this fund call about what the immediate future will hold for them and when people become uncertain of the future they are less likely to commit to capital purchases.

I think that the challenge the government and we all face today, is a reversal of additive and it appears, I don’t want to make this a political conversation, but it appears that the markets have not embraced what the government has released in the last 30 days and I would strongly suggest that not only relates to my business, but to your business John and everybody else’s business that if this attitude prevails its tough to be very positive about what’s going to happen next. I think it’s more likely to be negative than positive.

John Hecht - JMP Securities

Looking at, you guys have your pipeline, you have your probably your potential contracts outstanding and at this point is it just, where you are sitting Paul is it that there is no visibility, you can’t tell if your customers are going or are there certain components in the market that there is demand and its just a matter getting pricing correctors or its just so far that you can see though the fog at this point.

Paul Sinsheimer

Well, if you gave me a choice that I take the latter, but it’s a host of things, right now the government appears to the only source of revenue. Whether construction on the private side is winding down, home building we all know where that sits, public works, project I had hoped and I think most of us had hoped for a bigger portion of this stimulus package to have a much larger infrastructure component.

I think we are all disappointed about that, but until the economic cloud start to thin out, I think you would have to be more conservative than you normally would be.

John Hecht - JMP Securities

Okay. Thanks very much for that color. Then turning to margins, obviously short term rates pretty much can’t go lower than where they are now and your cost of funds has moved in favor, in correlation with that. What can we expect with your cost of funds, I know you guys have been toggling a little bit between Prime and LIBOR. Are you going to get a little bit more of a benefit in the coming months before your short-term rates stabilize and then what are you seeing to the extent you are originating your loans in the pricing side?

Paul Sinsheimer

John, I’ll take the first half of that. Now, let Steve take the toggle question or the toggle part of the question. It’s interesting, what we have surely to call a trend but prepayment activity slowed measurably in the last 90 days as fewer competitors trying to refinance our client base. So, our yield in our port-folio went down as a result of that. The second observation was we do have a small portion of our assets that are time plus percentage floating and obviously the Prime rate went down significantly in the last 90, 120 days. So, that portion of our asset yield went down.

What I can tell you is to the extent we are riding new business, it is at rates that are higher than the current port-folio yield, when that mix eventually causes a turn its arithmetic in nature and it more slowly than it does quickly, whether rates go up or down and I’m sure you know that.

We are definitely writing business at higher rates, but in the short run we are not getting the pre-payment affects to our overall yield and I agree with you that the short-term interest rates could go down to benefit this in that regard, Steve as it relates to the toggle portion of the question.

Steve Groth

On cost of funds, John we have been as we’ve spoken in the past working with legacy spreads from facilities both in the conduit and in the bank lines and we also grow in and out of commercial paper based on the opportunistic weight and we do have some commercial paper we want to keep our feet in that market. We are expecting cost of funds to rise for us, as I renew facilities and actually explore new opportunities.

Obviously, the credit markets have widely spread and you are correct LIBOR can’t get much lower. We are pricing on the one to 30 day in some case for a couple of months and that’s around 40, 50 bases points. So, we should see a little rise as I renew facilities. Obviously in the queue you can see that we’ve got $40 million of bank lines coming due and not much this year, 25 in the third quarter and 15 in the fourth and then we have got the renewal of our conduit.

On the Prime question that was just one very short period during the third quarter when the markets absolutely froze up, and Prime was actually a better alternative than going in with our small spread over LIBOR, because LIBOR rates went to six and seven. So that was a very short period, we are not borrowing a Prime with any of our facilities.

John Hecht - JMP Securities

Okay. So it’s LIBOR sensitivity now.

Steve Groth

Correct.

Operator

Your next question comes from Brian Hogan - Piper Jaffray.

Brian Hogan – Piper Jaffray

Hello guys, it’s actually Brian Hogan for Bob. A quick question on pretty much kind of in fact the credit quality and so, but collateral values. Can you give an update on how collateral is actually you holding up, I mean the dollars weaken which is been a kind of driver or actually appreciated in which when was weaker was holding up the collateral values. Can you just kind of give your thoughts on that?

Paul Sinsheimer

Sure, Brian. Collateral value in a general statement are getting weaker, more specifically most of the pain has already been experienced in our transportation portfolio, that’s not to suggest that they won’t give weaker, then on the marginal side of that answer not very much more. I don’t want to tell you bought them, I can’t imagine them getting much lower then they currently are.

Construction equipment is in the state of change right now and all of the arrows are pointing negatively not only because the U.S economy is slowing down, but in general the world-wide economy is slowing down, where these prices will eventually bottom out, I don’t know, but what I can tell you is from 38 years in the business Construction equipment as it ages doesn’t loose its value as far as and over-the-road truck looses its value as it ages.

By that I mean, we are highly unlikely to finance a 10 year old truck and would absolutely love to finance a 10 year old crane and so as construction prices tend to get weaker, we are less concerned about that at a macro level than we are with transportation asset. Just because of the expected normal economic life. We don’t want to be in 10 year old trucks and we are not looking to be in 10 year old construction asset, but we’re not as fearful either.

Operator

(Operator Instruction). Your next question comes from Scott Valentin - FBR Capital Markets.

Scott Valentin - FBR Capital Markets

Just on the credit quality, I think you guys for a while have said that you have strong credit quality and given the economy it’s starting to get worse, but just looking at the past dues and the non-performers going up this quarter. Looking at the reserve level increasing, little bit less its just curious to how kind of all three of those parts put together. May be if you can give us an idea on the reserving methodology?

Paul Sinsheimer

Well, the reserving methodology is arithmetic and was established many years ago and obviously all of the operating components of our portfolio affect that formula. Delinquencies, non-accruals, repossessions, losses, they all have a part in coming up with the arithmetic conclusion of the size of the reserve for loss.

We have had this policy for many years. We implement the policy today, the same way we did three years ago and several years ago. As to general asset quality I think I’ve already stated I think it’s more likely for it to get worse rather than to get better.

How much worse and how quickly that’s more of a macro economic question and answer that each of us can take a stay of that. I Hope, I got your answer Scott, if I didn’t give it clearly maybe you could rephrase it.

Scott Valentin – FBR Capital Markets

No, that was it. I was just curious if there has been any shift given you are seeing acceleration may be if credit problems and asset values are getting weaker, may be if there is a shift in the reserving policies, but more reserves are up for any given delinquency?

Paul Sinsheimer

No. the simple answer is no. It’s a formula and a policy that’s been around for a long time and it’s the same one today as it was then.

Scott Valentin – FBR Capital Markets

And then in terms of the portfolio on that selling needs to be, I’ll make it roughly 40-40-20 the construction, transportation and waste hauling in that order, is that still the kind of a mix or has it changed it all?

Paul Sinsheimer

Its pretty close, but I would think it’s less on the marginal side in transportation because there has been a greater contraction there, but you wouldn’t be too far off with those numbers.

Scott Valentin – FBR Capital Markets

Then underwriting, have you changed underwriting stands, it’s all tightened up may be requirements from borrowers.

Paul Sinsheimer

Did we change our policy? No, but are we as human beings affected by what we read in the newspaper, and I had screen dates on SpotBox in the morning, I think the general attitude of people today is more conservative than liberal when it comes to underwriting.

We haven’t changed our policy, but I can assure you that none of us feel as bulletproof as we did two years ago, when our net losses were 1 basis point.

Scott Valentin – FBR Capital Markets

And the final question. Aside from the convert coming up, any other debt maturities or lines of credit that mature?

Paul Sinsheimer

Steve.

Steve Groth

I mentioned just a minute ago on the call Scot that we have $40 million of bank lines, unsecured bank lines coming through, 25 in the third quarter and 15 in the fourth quarter and then we are in the process of renewing the $325 million conduit at the end of April, it was the only maturities other than term amortization.

Scott Valentin – FBR Capital Markets

Okay. And then discussions with lenders on the conduit I guess are progressing.

Steve Groth

Yes.

Operator

Your next question comes from John Hecht - JMP Securities.

John Hecht – JMP Securities

Actually guys, you answered most of it that with your responses to Scott’s question about credit; but I guess the only follow-up I have in addition to that would be on a reserve coverage basis you are very strong in relation to your charge off levels, but given your policy, is there some maximum rate of reserves as a percentage of assets we should consider or as charge offs go up would that just climb ir-reflective of it’s position against your loan balances.

Paul Sinsheimer

Let me attempt to answer what I think your question was. I think I would be safe in saying that as our net losses increase, we would be required to increase the size of the reserve, but that’s knowing my answer as a non-accountant, but as somebody trying to imply some common sense. I think that is our losses go up; our reserve for bad debt will go up. If they spike I would presume the reserve itself would spike. Steve, go ahead.

Steve Groth

You also have an increasing percentage of reserves based on the contracting portfolio. So you’re building up reserve against assets, which also makes a difference and you’re right in pointing out that we have 3.5 times coverage on the losses, but when we look at this provision and the methodology, as Paul stated, we’re looking at delinquencies and trends going back a couple of years, as well as an experiential factor that actually looks at today’s credit quality. Does that answer it?

John Hecht – JMP Securities

Yes, okay. No, that does; I was trying to decide if there is some level against assets or finance receivables that would make sense, but it’s more based on delinquency and charge off trends from the current portfolio. So, I appreciate that. Thanks very much.

Paul Sinsheimer

Okay.

Operator

Your next question comes from Bob Napoli - Piper Jaffray.

Brian Hogan – Piper Jaffray

Yes thanks, its Brian again. I know liquidity is very precious for this cash, but you have a $55 million share repurchase program I believe out there and just kind of your thoughts around that please?

Paul Sinsheimer

Sure Brian. Capital is precious. It’s a circumstance and a situation the Board reviews quarterly. I can’t give you any more color than that than I normally would, except to say that we will hopefully act in a prudent manner and in a consistent manner.

Brian Hogan - Piper Jaffray

You didn’t buy back any in the quarter end?

Paul Sinsheimer

We did not buy back any common stock in the quarter that I know Steve?

Steve Groth

No, we did not; and you’ll recall that when we increased the program, the program includes the convertible securities, so that’s really where the activity was this quarter.

Steve Groth

Buying back opportunistically on the convertible bonds, we did not purchase any common stock.

Operator

And I’m sure you have no further questions at this time. I would now like to turn the call back over to you gentlemen for closing remarks.

Paul Sinsheimer

I thank all of you for attending this conference call. We look forward to speaking to you in about 90 days from now. Have a good day.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Financial Federal Corp. F2Q09 (Qtr End 01/31/09) Earnings Call Transcript
This Transcript
All Transcripts