Asta Funding Management Discusses Q2 2013 Results - Earnings Call Transcript

May. 9.13 | About: Asta Funding, (ASFI)

Asta Funding (NASDAQ:ASFI)

Q2 2013 Earnings Call

May 09, 2013 4:00 pm ET

Executives

Gary Stern - Chairman of The Board, Chief Executive Officer and President

Robert J. Michel - Chief Financial Officer, Principal Accounting Officer and Secretary

Analysts

R. Gregg Hillman - First Wilshire Securities

DeForest R. Hinman - Walthausen & Co., LLC

Robert Majek - Majek Capital Management

Operator

Good afternoon. My name is Shannon, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Asta Funding Inc. Conference Call for the 3- and 6-month periods ended March 31, 2013, and the fiscal year ended September 30, 2013. [Operator Instructions] On the call today is Mr. Gary Stern, Chairman and Chief Executive Officer; and Mr. Bob Michel, Chief Financial Officer.

Before our host, Gary Stern, discusses the company's current results, let me take a few minutes to read the following statements.

Except for statements of historical facts, all of the statements made during the conference call are forward-looking statements. Although Asta Funding believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, there can be no assurance that these expectations will be realized.

Forward-looking statements are not guarantees and are subject to numerous known and unknown risks and uncertainties that could cause actual results to diverge materially and adversely from the results expressed or implied by such forward-looking statements.

Factors that contribute to such differences include the company's ability to purchase defaulted consumer receivables at appropriate prices, changes in government regulations that affect the company's ability to collect sufficient amounts on defaulted consumer receivables, the company's ability to employ and retain qualified employees, the company's ability to fund future portfolio investments, changes in the credit or capital markets, changes in interest rates, deterioration in economic conditions, negative press regarding the debt collection industry, which may have a negative impact on a debtor's willingness to pay their debts, statements of assumptions underlying any of the foregoing and those factors identified in Asta Funding's Annual Report on SEC Form 10-K for the fiscal year ended September 30, 2012, filed with the Securities and Exchange Commission and from time to time in other filings with the Securities and Exchange Commission. Asta Funding's filings with the Securities and Exchange Commission are available, free of charge, through the company's website at www.astafunding.com.

Now let me turn the call over to Gary Stern.

Gary Stern

Thank you. Good afternoon, everyone, and thank you for joining today's conference call. We are pleased to announce a profitable first 6 months and second quarter of fiscal year 2013 in which we reported net income attributable to Asta Funding of $3.5 million for the first 6 months ended March 31, 2013, as compared to $5.4 million in the 6-month period ended March 31, 2012.

Net income attributable to Asta was $882,000 in the second quarter of fiscal year 2013 as compared to $2.5 million for the same prior year period.

Impairments of approximately $2.2 million did impact both the 3- and 6-month periods. Included in the results of the 3- and 6-month periods ending March 31, 2013, is income from zero basis portfolios of $8 million and $16.1 million, respectively, as compared to $9.2 million and $17.8 million, respectively, in the same prior year periods. Although zero basis revenue is lower, it remains at historically consistent levels given the status of the aging portfolio. The face value of the zero basis judgment portfolio at March 31, 2013, is approximately $1.4 billion spread out over 200 portfolios.

As we move through fiscal year 2013, we have a very strong balance sheet, no senior or subordinated debt, strong cash flow and are positioned well for investment opportunities. In addition, we are also pleased with the progress of the Pegasus Funding, LLC joint venture in which we have invested approximately $16 million in personal injury claims during the first 6 months of fiscal year 2013.

We look forward to continued success in this venture.

Our cash and securities position at March 31, 2013, was $107.1 million. And as of today, we have approximately $108 million of cash and securities or $8.17 per diluted share. Due to our strong financial position, I want to stress that we continue to seek investments in, or acquisitions of, companies in the financial services industry as well as distressed debt portfolios.

Overall, we are pleased with the results of the first 6 months and second quarter of fiscal year 2013.

Now I'd like to turn the call over to Bob Michel, our Chief Financial Officer, who will provide some additional details of the financial results.

Robert J. Michel

Thank you, Gary, and good afternoon. For the 6 months ended March 31, 2013, we reported net income attributable to Asta Funding of $3,470,000, or $0.26 per diluted share, as compared to $5,437,000, or $0.37 per diluted share, for the 6 months ended March 31, 2012.

Net income attributable to Asta Funding was $882,000, or $0.07 per diluted share, for the second quarter of fiscal 2013 as compared to $2,460,000, or $0.17 per diluted share, for the same period of the prior year.

During the second quarter of fiscal 2013, we recorded impairments of approximately $2.2 million, which impacted both the second quarter and 6-month periods.

The company reported total revenues for the second quarter of fiscal year 2013 of $10,085,000 as compared to $11,470,000 reported for the second quarter of fiscal 2012.

Although we have limited consumer debt portfolio purchase over the last 3 years, we continue to report good zero basis income. Zero basis income of approximately $8 million in the second quarter of fiscal year 2013 compared to $9.2 million in the same prior year period.

Although the zero basis income is lower, given the age of the portfolio, the quality of the portfolio is evidenced by the level of collections on portfolios that are past the aging of the original projections.

Total revenues in the 6-month period ended March 31, 2013, was $20,637,000 as compared to $21,909,000 for the first 6 months of 2012. Zero basis income for the 6-month period ended March 31, 2013, was $16,072,000 as compared to $17,830,000 that we reported for the first 6 months of March -- at March 31, 2012.

Included in other income for the 6-month period ended March 31, 2013, is approximately $2,634,000 of fee income from the personal injury joint venture of Pegasus Funding, LLC as compared to $492,000 included in both the 3- and 6-month periods ended March 31, 2012, as the joint venture was consummated on December 28, 2011. Included in other income for the second quarter of fiscal year 2013 was $1,392,000 related to Pegasus Funding. Pegasus Funding purchases interest and personal injury claims from claimants who are party to personal injury litigation with the expectation of a settlement in the future.

We have a net invested balance of approximately $28 million at March 31, 2013.

Net cash collections of receivables acquired for liquidation during the second quarter of fiscal 2013 was $13,000,004 -- $13,004,000 as compared to net cash collections of $18,713,000 in the second fiscal quarter of 2012. Net cash collections of receivables acquired for liquidation were $26,613,000 for the 6-month period ended March 31, 2013, as compared to $35,683,000 for the same period in the prior year.

Net collections on the Great Seneca portfolio were $2,988,000 in the second quarter of fiscal year 2013 as compared to $3,394,000 reported in the second quarter of fiscal year 2012.

Net collections on Great Seneca portfolio for the 6-month period of fiscal year 2013 were $5,641,000 as compared to $6,114,000 for the first 6 months of fiscal year 2012.

Carrying value of the Great Seneca portfolio at March 31, 2013, was $59.8 million, and the nonrecourse loan balance with the Bank of Montreal is $56.8 million as of the same date.

General and administrative expenses for the second quarter of fiscal year 2013 were $5,788,000 as compared to $6,032,000 for the second quarter of fiscal year 2012. G&A was lower due to lower salary and benefit costs as we have reduced our in-house collection activities to rely on our established outsourced services. Other impacts of this action yielded lower postage and communication costs. Offsetting further savings is the inclusion of Pegasus Funding, LLC in our consolidated results as this unit -- as the unit is continuing its growth.

General and administrative expenses for the 6 months ended March 31, 2013, were $11,381,000 as compared to $10,798,000 reported for the 6-month period ended March 31, 2012, as Pegasus-related expenses were included for the entire 6-month period in the current fiscal year but only for the 3-month period in fiscal 2012. Cost containment actions have more of an immediate impact on the current quarter results.

G&A expense after legacy-related activities were lower by approximately $1 million during the second quarter of fiscal year 2013 as compared to the second quarter of fiscal year 2012. This reduction was approximately $1.8 million for the 6-month comparative periods.

Interest expense was $534,000 for the second quarter of fiscal year 2013 as compared to $646,000 for the second quarter of 2012 as the company continues to pay down the nonrecourse debt.

Interest expense was $1,103,000 for the 6-month period ended March 31, 2013, as compared to $1,320,000 for the same period a year ago. The company has no senior or subordinated debt as of March 31, 2013.

Impairments of $2,203,000 were recorded in the second quarter of fiscal year 2013 as compared to an impairment of $611,000 recorded in the same period of the prior year.

Three portfolios entering the later stages of the forecasted cash flow periods showed signs of slowing collections. Therefore, we took the action of writing down the portfolios to their net realizable value.

As Gary previously mentioned, we currently have approximately $108 million in cash and securities.

The company's book value per share as of March 31, 2013, was $13.15. Also, for the 3-month period ended March 31, 2013, the company repurchased 20,500 shares of the company's stock at a cost of $193,000.

That concludes my remarks on the financial results. I'll turn the call back to Gary.

Gary Stern

Okay, thank you. Now we'd like to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Alan Joban [ph] of Joban [ph] & Company.

Unknown Analyst

It seems to me -- I've been a long-term shareholder of the company. And knowing your goals are clearly to increase the business, and that would be reflected by an increase in the book value. You said during the last quarter you bought 20,500 shares back. With the stock trading at $9.34 and having a book value of $13.15, every share you buy at $10 a share would be a 31% increase in the book value. In order to get that same increase in book value, you're going to have to have some really fantastic results as a return on your equity. I don't understand why you don't have a very much more aggressive stand in buying back your stock if it's -- if people are just giving it to you. Because you know that the book value, of course, is understated because you're still getting income off portfolios that are not on the books. So it would be a tremendous opportunity to buy back 3 or 4 million shares if you could, but I think I'd like to see you try to do that. I think that would help everybody, the shareholders and you as well. You have the cash to do it and you've had the cash for years.

Gary Stern

Okay, this is Gary. We've -- we bought back quite a bit of stock through a buyback plan that ended, I believe...

Robert J. Michel

In March.

Gary Stern

In March. And we are considering that, and we're going to discuss -- continue to discuss that with the board. But our buyback plan stopped end of March, and we brought approximately 2 million shares back over a period of time.

Operator

Our next question is from Gregg Hillman of First Wilshire Securities.

R. Gregg Hillman - First Wilshire Securities

Gary, can you talk about the judgments for the non-Seneca portfolio, I guess the Seneca portfolios, too, whether they somehow decay over time? Or what's your sense of the value of those judgments? One is I think $1 billion, another is like $1.3 billion. What's your sense of that?

Gary Stern

We don't -- we've never discussed values and don't want to project what the values are. But the cash flow seems to be consistent and based on historical numbers. So we're not going to put a value on it, but it seems like they're holding up pretty well and we're collecting a decent amount of money on these judgments.

Operator

Our next question is from Robert Majek of Majek Capital Management .

Robert Majek - Majek Capital Management

For how long do you see your current portfolio of fully-amortized receivables generating steady cash flow going forward?

Robert J. Michel

Well, again, we don't -- this is Bob Michel. We don't project on future values, but we're very pleased with the current trend of the collections of the zero basis portfolios.

Operator

We have a follow-up question from Alan Joban [ph] of Joban [ph] & Company.

Unknown Shareholder

The accounting, Bob. When you do a write-off of a couple of $2 million off a portfolio, there's no write-up on the portfolios that you're getting cash from that have already been written down. Why is it just a write-down and not a write-up?

Gary Stern

I mean, most of our portfolio is now down to a very low book level cost. And once it's in zero basis, it's just the cash -- the cash flows in and it's recognized as income. The portfolio is not at the level of -- at the high level that it once was in terms of being able to write these portfolios up. They're all coming out and aging out very shortly, and they're all -- except for these 3 in this quarter, they're all -- the remaining amount are on track with their cash flows.

Operator

Our next question is from the DeForest Hinman of Walthausen & Company.

DeForest R. Hinman - Walthausen & Co., LLC

Yes, I had a couple of questions. Can you kind of talk about where we stand with the Bank of Montreal with the -- with that line of credit that we have with them? And we're kind of getting, it looks like an inflection point where, I guess, the carrying value of that portfolio is getting more close to the -- the debt. Has there been any discussions with them about that loan that's currently in place in terms of the terms or an extension? Or any updates in that regard?

Gary Stern

We really don't have any updates.

DeForest R. Hinman - Walthausen & Co., LLC

Okay. And...

DeForest R. Hinman - Walthausen & Co., LLC

Sorry, go ahead, sure. And my question was kind of more a big picture question. We've seen some upward price movements in some markets in -- on home prices. And in the past, I think you -- your company had done well monetizing the fact that people that had some liens on their homes, when they did a refinancing transaction or they sold their home, you were able to collect on those liens. Have you saw any early indications that, that is starting to pick up at this time?

Gary Stern

Yes, I don't know on our portfolio yet, but we sure hope that as the value of houses increases, we'll begin to see that.

Operator

Our next question is from Gregg Hillman of First Wilshire Securities.

R. Gregg Hillman - First Wilshire Securities

Yes, a couple of points, if it's possible. Number one, Gary, it would be great if you can make Max and Alex at Pegasus available to investors at some point to talk. And the number two, the tax season -- the late tax season, did that affect the quarter that you just reported?

Gary Stern

Yes. It's already first quarter, yes.

R. Gregg Hillman - First Wilshire Securities

Because normally, it's a strong quarter. But by the way the tax season is less so [ph], do you think some of that will fall into the next quarter?

Gary Stern

That's -- it's possible. We're not seeing any dramatic drop-off.

R. Gregg Hillman

Okay. Well, and then, Gary, did you -- do the judgment require additional investments every year? Or is your level of investments in this portfolio truly gone down since you've acquired [indiscernible] portfolio?

Gary Stern

Well, it does require some investments if we choose to renew the judgment and extend the life of the judgment. But the amounts are not significant.

R. Gregg Hillman - First Wilshire Securities

So it's less than a couple million dollars? It's not a big number?

Gary Stern

I don't have it in front of me. Yes, I don't -- I was -- it's not -- I don't believe it's anywhere near the $2 million. It's year by year, and I don't have the schedule in front of me. But the amounts required are -- if we do decide to renew the judgments, are well worth it.

R. Gregg Hillman

Okay. It seems like with an increased velocity, there must be some national economic data on the velocity of houses that, that will help you and make those, in particular, the Seneca portfolio, more valuable. Do you think that's a true statement?

Gary Stern

We don't know. Look, the houses are -- they may go up in value. But remember, people have to have equity. Because if they don't have equity in the house, there are still issues. So I think we still have a way to go before the housing market goes high enough before we'll see any impact at all in the judgment. But I may be wrong, the crystal ball. I'm not sure.

Operator

Thank you. I'm showing no further questions at this time. I'd like to turn the conference back over to Gary Stern for closing remarks.

Gary Stern

Thank you for participating in our second quarter of year 2012 conference call. As always, if you have any additional questions, feel free to call Bob or myself. Have a pleasant day.

Operator

Thank you for participating in today's teleconference. Have a pleasant day.

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