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Asta Funding, Inc. (NASDAQ:ASFI)

F1Q 2014 Earnings Conference Call

February 10, 2014 4:00 p.m. ET

Executives

Gary Stern - Chairman, Chief Executive Officer and President

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

William Skyrm - Co-Founder and CEO of CBC Settlement Funding, LLC

Analysts

Nathaniel August - Mangrove

Gregg Hillman - First Wilshire Securities

Justin Van Vleck - Linden Advisors

Philip Lee - Mangrove

Operator

Good afternoon. My name is Karen, and I will be your conference operator today. At this time, I would like to welcome everyone to the Asta Funding Inc. Conference Call for the three months period ended December 31, 2013, the First Quarter of Fiscal Year 2014. (Operator Instructions) Thank you.

On the call today is Mr. Gary Stern, Chairman and Chief Executive Officer; Mr. Bob Michel, Chief Financial Officer; and Mr. William Skyrm, Co-Founder and CEO of CBC Settlement Funding, LLC.

Before our host, Gary Stern, discusses the company's current results, let me take a few moments 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 could 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 purchases; 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 effect on a debtor's willingness to pay their debts; statements of assumption 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, 2013 filed with the Securities and Exchange Commission and, from time to time, in its 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're pleased to report a profitable first quarter of fiscal year 2014, in which we reported net income of $2.4 million as compared to net income of $2.6 million reported for the first quarter of fiscal year 2013.

As we move through the early stages of fiscal year 2014, we have a very strong balance sheet, no senior or subordinated debt, and strong cash flow, and are positioned well for continued investment opportunities in the financial services space.

Our cash and securities position at December 31, 2013 was $94.6 million. As of today, that number has increased to just under a $100 million.

The significant news from the quarter was our acquisition of an 80% interest in CBC Settlement Funding, LLC on December 31, 2013. And on the call today is Bill Skyrm, Co-Founder and CEO of CBC Settlement Funding, LLC. Bill is an attorney, and he along with his partner James Goodman has over 30 years combined experience in the structured settlement business. We welcome Bill and James to the management team.

CBC Settlement Funding, LLC purchases periodic payments under a structured settlement and annuity from individuals and exchange for a lump sum payment. As of December 31, 2013, CBC had an invested balance of approximately $30 million in structured settlements.

Please note that our cash and securities balance as of today is inclusive of the purchase of our interest in CBC, which closed on December 31, 2013.

As we mentioned on the conference call for the fourth quarter of fiscal year 2013, we established AGR Disability Help Center, LLC. AGR Disability Help Center is the group established during fiscal year 2013 to act as advocates to individuals applying for disability benefits. The fees earned on a successful claim advocacy can take between 12 and 18 months to materialize. Although fee income today has not been material, we're pleased with the progress of the venture today in terms of cases (settled).

We continue to progress with our investment in personal injury claims from Pegasus Funding, LLC, investing $4.5 million in the first quarter of fiscal year 2014 with collections on claims settled of $9.8 million as compared to $3 million from the prior year.

In addition, I can report that we're working diligently to affect cost efficiencies, and most of all, to seek additional acquisitions, strategic alliances, joint ventures etcetera for purposes of enhancing shareholder value.

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

Robert Michel

Thank you, Gary, and good afternoon. For the first quarter of fiscal year 2014, we reported net income attributable to Asta Funding income of $2,389,000 or $0.18 per diluted share, as compared to reported net income attributable to Asta Funding, Inc. of $2,588,000 or $0.20 per diluted share for the first quarter of fiscal year 2013.

Net income attributable to Asta Funding interest increased 205,000 or 7.8% to $2,838,000 from $2,633,000 from the prior year, largely due to result of a significantly lower interest expense that was lowered by over half a million dollars in the first quarter of fiscal year 2014.

Company reported total revenues for the first quarter of fiscal year 2014 of $10,237,000 as compared to $10,552,000 reported for the first quarter of fiscal year 2013.

Finance income from fully amortized portfolios, or zero basis revenue, $6,795,000 in the first quarter as compared to $8,146,000 in the first quarter of fiscal year 2013.

Other income was $3,322,000 during the first quarter as compared to $2,062,000 reported in the first quarter of fiscal year 2013. Primary reason for the increase in other income is a result of Pegasus Funding, LLC, as income more than doubled to $2,779,000 in the first quarter of fiscal year 2014, as compared to $1,242,000 reported for the first quarter of fiscal year 2013.

Net cash collections of receivables acquired for liquidation during the first quarter of 2014 were $10,204,000 as compared to net cash collections of $13,609,000 in the first quarter of fiscal year 2013. Cash collections represented by account sales were not material for both periods.

Net collections on Great Seneca, the portfolio were $2,466,000 during the first quarter, as compared to $2,653,000 during the same period of prior year.

Carrying value of the Great Seneca portfolio at December 31, 2013 was $40,926,000 as compared to $62,780,000 at December 31, 2012.

Balance on our non-recourse debt to the Bank of Montreal securitizing the Great Seneca portfolio was $33,132,000 at December 31, 2013 as compared to $58,843,000 at December 31, 2012.

We invested approximately $4.5 million in personal injury claims during the first quarter of fiscal year 2014 through the joint venture Pegasus Funding, LLC.

Cash collections on cases settled with $9.8 million during the first quarter of fiscal year 2014, as compared to $3.2 million during the first quarter of fiscal year 2013.

General and administrative expenses for the fiscal year 2014 period ended December 31, 2013 were $5,767,000 as compared to $5,593,000 for the first quarter ended December 31, 2012. G&A expenses increased primarily due to the inclusion of AGR Disability Help Center in the first quarter of 2014 with no comparable results for the first quarter of fiscal year 2013. Fees on disability case are generally earned between 12 and 18 months after the case was assigned.

General and administrative expenses for the Asta core business and Pegasus Funding, LLC will lower during the first quarter of this year. There were no impairments in the first quarter of fiscal years 2014 or '13.

Interest expenses, $9,000 for the first quarter of fiscal year 2014, as compared to $569,000 for the first fiscal quarter of the prior year as the result of the new settlement agreement signed in August of 2013 with the Bank of Montreal. New agreement significantly reduced the interest rate and the balance on which interest is accrued.

On December 31, 2013 we acquired 80% interest in CBC Settlement Funding, LLC, a structured settlement company located in Conshohocken, Pennsylvania, a suburb of Philadelphia. CBC purchases periodic payments under a structured settlement and annuity from individuals in exchange for a lump sum payment.

At December 31, 2013, CBC had approximately $30 million in structured settlement investment. As the acquisition consummated on December 31, 2013, it was not accretive to Asta's results for the first quarter. Purchased price is approximately $5.9 million.

As Gary previously mentioned, our cash in security position was $94.6 million at December 31, 2013 and as of today, it bounces just under $100 million in cash and securities. Company's book value per share as of December 31, 2013 was $13.30.

And this concludes my remarks on the results. Now, I'll turn the call back to Gary.

Gary Stern

Thank you, Bob. Now, we'd like to take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Philip Lee from Mangrove.

Nathaniel August – Mangrove

Hi, guys. This is Nathaniel August on for Philip. I was hoping that you could give us some additional detail on CBC and really how it compares with JTW, which I think is the public comparable, specifically in terms of -- are you also only purchasing receivables after you have gotten a court approval? And then, when you are recognizing revenue on that in this go-forward period, are you going to be doing it again, on sale basis or on a spread basis?

William Skyrm

Hi, this is Bill Skyrm from CBC. CBC does purchase structured settlement and annuity receivables. We have originated to warehouse to distribute finance model. And we expect to originate all structured settlements in compliance with the applicable Structured Settlement Protection Act that had been adopted in 48 of the 50 states, and certainly obtained court orders with each one of our transactions.

As far as how we record the asset, we do not record them on a spread basis, but rather on a gain on sale basis.

Nathaniel August – Mangrove

Okay. And then as a follow-up, the $23.4 million of debt that you recorded, I assume that was in connection with CBC. Is that recourse to the company? And then, in terms of gain on sale margins, could you tell me where gain on sale margins are as relative to sort of whatever metric you are using whether it's your gross cash payments for the structured settlement or the total amounts of cash that you expect to receive over time.

Gary Stern

Bob, on that $23 million number, that --

Robert Michel

The $13.8 million is the non-recourse piece. It's the balance at a financial institution, which is --

Gary Stern

There is a portion of the receivables that have been financed as part of private placement transaction. And there is a portion that's attributable to the current warehouse balance.

Nathaniel August – Mangrove

Okay, and in terms of gain on sale margin?

Robert Michel

The assets are -- for GAAP purposes, valued at a 5.5% discounted from total value.

Nathaniel August – Mangrove

I was hoping that you could put that in context relative to the total cash that you are sort of paying, so if you are paying us 10% or 13% discount rate or something like that?

Robert Michel

That's the information that we have disclosed at this point.

Nathaniel August – Mangrove

Okay, terrific. I'll get back in the queue then.

Operator

Thank you. And our next question comes from the line of (inaudible), a private investor.

Unidentified Analyst

Hi. Thanks for taking the call. I guess just looking at the portfolio mobility, every quarter somebody asked you about doing share buybacks and obviously you guys are keeping a bit of cash balance. I was wondering just if you could talk about other potential opportunities that you're going to be looking at. And also, obviously it depends on the opportunity. But if you could just try and give -- I know you said you can give with regard to CBC. But if you could just try and give us some idea of the sort of discount rate that you guys normally look at or the return on equity that you guys normally project from potential investments?

Gary Stern

Just repeat the question please, because there was static here. It's hard to follow.

Unidentified Analyst

Yes, sure. One other thing is -- with such a large cash balance, I was just wondering if you guys could discuss some of the opportunities that you are looking at investing at the moment. And also, if you could just give us some sort of idea of the return on investment that you guys generally look for when you make investments. I understand that obviously it will depend on each investment and there will be lots of different criteria. But just a general bit of information would be useful. Thank you.

Gary Stern

Again, we can't really delve on -- disclose the different opportunities that we are looking for. Any kind of details, we're very open and flexible to make acquisitions of financial settlements to come. We also are looking internationally to buy portfolios or consumer receivables. That's fine when we comment in response to your question.

Robert Michel

Okay. This is Bob Michel. We generally don't disclose our return estimates to the public. Our results have spoken to themselves over the years in terms of the return on our investments. We don't pin down a specific guideline to disclose it to public.

Unidentified Analyst

Okay, thank you.

Robert Michel

Thank you.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Gregg Hillman from First Wilshire Securities.

Gregg Hillman - First Wilshire Securities

Good afternoon, gentlemen. Gary, could you talk -- number one, congratulations for generating these emerging businesses for the company. It has created a much more promising picture and for the outlook of Asta in going forward. Number one, I wanted to ask you about the disability business. I believe that advocates are empowered up to $6,000 by the federal government for a case. Is that correct?

Gary Stern

Yes.

Gregg Hillman - First Wilshire Securities

And do you expect to get a full $6,000 for each case that you take, or would you get some subset of that?

Gary Stern

(Technical Difficulty)

Gregg Hillman - First Wilshire Securities

Gary, I didn't hear what you say. It was like a little bit grabbled. Something was wrong with the phone.

Gary Stern

All right, I think we would not expect to get $6,000 on each case. We might get $6,000 on some cases.

Gregg Hillman - First Wilshire Securities

Okay. So, it's not the -- so, the average is less than $6,000 probably?

Gary Stern

Yes.

Gregg Hillman - First Wilshire Securities

Okay. And in terms of the Pegasus, is that getting mature in terms of the money you continue to put into that, do you think, or did it mean it shouldn't grow much more quarter-over-quarter in terms of the money you invest in that. Is that correct or could that continue to grow?

Gary Stern

It's hard to tell exactly, but based on the collections that, which is already strong in our last quarter, it shouldn't grow too much. But collections are somewhat lumpy at times. As settlements occurred, there could be different timing business. So, it may grow somewhat. But we are very happy with the collection so far and hopefully that will continue such amount that would say to us that they should not -- the investment should not grow.

Gregg Hillman - First Wilshire Securities

Okay. I don't think I quite understood that you are saying that the collections can be lumpy, but just in terms of your relationship with the lawyers and the amount of money that's requested of you after you evaluate good cases. Do you think that's going to continue to grow, or do you think that's like more matured for Pegasus, the amount of money you are putting in?

Gary Stern

We add on commitment for $20 million here. And basically it's not in this business; there is a lot of business out there. The key is in any business, to select the case which is the best case and that's what we are trying to do. So, there seems to be a steady stream of cases out there and hopefully that continues.

Gregg Hillman - First Wilshire Securities

Okay. And then finally, it's my understanding that the CBC is more matured competitive business than Asta Funding. And then, so you expect lower returns on investor capital in CBC than Pegasus? Do you think that's true as a general statement?

Gary Stern

I think it's true as a general statement, but it remains to be staying in where you have a court order in almost all cases; I think Bill need to correct me if I'm wrong. But that 99% of cases are approved by the court stacked by insurance companies. So, the actual yields are lower than the cases from Pegasus, where the goals and the territory is always a risk versus reward and with the backing of insurance policies would affect losses to be beneficial. Pegasus, we have more spread and will allow for more losses.

I'd say that we're very, very happy with the losses so far, which had been not much compared to what we invest. That doesn't mean that's the role they can't impose, but so far it's been very positive experience as far as losses.

Gregg Hillman - First Wilshire Securities

And does CBC invest in lotteries?

Gary Stern

Bill? I don't know.

William Skyrm

Yes. CBC has not traditionally funded lotteries. What it sees as opportunities towards marketing efforts is able to monetize through broker relationships. But we continue to keep our options open for the future.

Gregg Hillman - First Wilshire Securities

Okay. So your relationships are with brokers, primarily lawyers basically?

William Skyrm

At CBC?

Gregg Hillman - First Wilshire Securities

Yes.

William Skyrm

CBC has a full range of marketing, both wholesale as well as retail direct to consumer marketing.

Gregg Hillman - First Wilshire Securities

Okay. Thanks very much.

William Skyrm

You may be referring to the Pegasus litigation funding that is often through attorney relationship.

Gregg Hillman - First Wilshire Securities

Okay. But you can mark it directly to consumer welfare?

William Skyrm

Correct.

Gregg Hillman - First Wilshire Securities

Okay. Thank you.

William Skyrm

Thank you.

Operator

Our next question comes from the line of Justin Van Vleck from Linden Advisors.

Justin Van Vleck - Linden Advisors

Hi guys, how is it going? Thanks for taking my question. Just want to confirm, you guys just called out your book value per share this quarter. Is that the number you guys are using when you're evaluating, whether or not you should buy back stock or engage in various acquisitions? So, in other words is that what you think a reasonably good proxy is for fair value for your stock?

Gary Stern

Yes, that's probably I guess that's the book value of the shares including global assets. They're on record. And we used to get a fair valuable stock.

Justin Van Vleck - Linden Advisors

Okay. So I mean, looking at some of these acquisitions you guys have done in last so many years now, and also maybe relatively small, maybe $3 million to $5 million, $8 million bite in new businesses. But giving as of a $100 million of cash on the balance sheet right now, why don't do something a share buyback or even the 30 or 40 million bucks where it will still give you guys a nice stockpile of cash to be able to (inaudible) some of these other acquisitions. But it would still be such a material portion of your market cap. But I have to think it'll be very good for your stock price.

So I know you have, let's say keep your -- you always want to keep your options open, which is understandable of course, but why not do at least some type of partial buyback with the stock or with the cash balance or what it is?

Gary Stern

So, we're considering this. The board, we all meet on a regular basis, but as of the last Board meetings, the feeling of Board is that we want to -- we have to keep the cash the way it is, and fill more cash, if possible. We made this investment in (safety space), which we – the audience have a self potential. The Pegasus investment is not $3 million to $5 million; it's basically higher than that. (Technical Difficulty)

Operator

Thank you. And our final question comes from the line of Philip Lee from Mangrove.

Philip Lee - Mangrove

Hi guys, just a few follow-up questions. First, could you update us on the status on the IRS audit that seems never done?

Robert Michel

Yes, we're continuing our work with the IRS, and we hope to come to a conclusion soon -- ongoing.

Philip Lee - Mangrove

Okay. And with regards to the Great Seneca debt, are you now in the period when you would be receiving the cash flows collected on that portfolio, or the cash flow is still being directed to BMO?

Robert Michel

Cash flows are still being directed to BMO at this time. We project out in the future that we will be getting the cash flows directly.

Philip Lee - Mangrove

Okay. And could you give any additional detail on what happened with the four calls firing at AGR, and maybe a little bit of background on the person that's now running it?

Robert Michel

We were not happy with the person or the manager's performance. We have several new people in there. We have some very experienced special security, (sororities), individuals, and in addition to that we've brought in one or two Asta Funding employees that have been with us for a while.

Philip Lee - Mangrove

Okay. What was the behavior that caused a termination for cost? Any sort of -- create any sort of liabilities that could pullback to the company or they're not that type of behavior?

Robert Michel

Based (inaudible), we don't dissipate it.

Philip Lee - Mangrove

Okay. And then lastly, I noticed that on the balance sheet, the amount funded to Pegasus dropped by about $5 million from the end of last quarter to the end of this quarter. I was hoping that you could comment on whether that was seasonal or whether that was related to the opportunities that you saw in the three months period, or maybe more broadly that you are trying to reallocate capital?

Robert Michel

It's relating to the commitment to the $20 million per year on the contract.

Philip Lee - Mangrove

Okay, great. Thank you very much.

Robert Michel

Okay, thank you.

Gary Stern

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

Operator

Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation, and you may now disconnect. Everyone, have a good day.

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