Asta Funding's (ASFI) CEO Gary Stern on Q1 2016 Results - Earnings Call Transcript

| About: Asta Funding, (ASFI)

Asta Funding, Inc. (NASDAQ:ASFI)

Q1 2016 Earnings Conference Call

February 09, 2016, 04:00 PM ET

Executives

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

Robert Michel - Chief Financial Officer and Secretary

William Skyrm - Chief Executive Officer and Co-founder, CBC Settlement Funding, LLC

James Goodman - President and Co-founder, CBC Settlement Funding, LLC

Analysts

Nathaniel August - Mangrove Partners

Gregg Hillman - First Wilshire Securities Management

Robert Balopole - Balopole Management

Operator

Good afternoon. My name is Chelsea, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Asta Funding, Inc. conference call for the three month period ending December 31, 2015, the first quarter of fiscal year 2016. [Operator Instructions]

On the call today is Mr. Gary Stern, Chairman and Chief Executive Officer of Asta Funding, Inc.; Mr. Bob Michel, Chief Financial Officer of Asta Funding, Inc.; Mr. William Skyrm, CEO of CBC Settlement Funding, LLC; and Mr. James Goodman, President of CBC Settlement Funding, LLC.

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 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 abilities to collect sufficient amounts on defaulted consumer receivables and/or adversely impact our structured settlement business; a change in statutory or cause law, which limits or restricts the ability of our structured settlement operating segment to the secure structured settlement cases at appropriate cost.

A change in statutory or case laws which limits or restricts the ability of our litigation funding subsidiary to charge or collect fees and interest at anticipated levels; statutory cutbacks on the Federal Disability program that would adversely impact the disability advocacy business; the company's ability to employ and retain qualified employees; the company's ability to fund future profit 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 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, 2015, filed with the Securities and Exchange Commission and from time-to-time and 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 are very pleased to report a profitable first quarter of fiscal year 2016, in which we reported net income of $1.8 million as compared to net income of $370,000 reported for the first quarter of fiscal year 2015.

There were revenue increases across all lines of businesses in the first quarter of fiscal year 2016, as overall income increased almost 18%. As we move through these early stages of fiscal year 2016, we have a very strong balance sheet, solid liquidity and are positioned well for continued investment opportunities in the financial services space.

The major event of the quarter was the purchase of the 20% interest in CBC Settlement Funding, LLC, the company did not already own. CBC has been very successful since our original investment in December of 2013, and moving forward Asta Funding will benefit a 100% from CBC's results. William Skyrm and James Goodman, the founders of CBC Settlement Funding, will continue to manage the business segment, and we thank them for their ongoing efforts.

Our investment position in structured settlements is approaching $70 million in present value. We continue with our growth in the personal injury space, as revenue from Pegasus Funding, LLC increased almost 24% from the prior year and investment position in personal injury claims is approximately $35 million.

In addition, we've continued to invest in the disability business segment, as revenue increased from $159,000 in the first quarter of fiscal year 2015 to $659,000 in this current quarterly period. Also we invested approximately $4.4 million in consumer receivables portfolios in the international sector in the first quarter of fiscal year 2016.

In addition, I can report that we are working diligently to affect cost efficiencies and most of all to seek acquisitions, strategic alliances or joint ventures for purposes of increasing 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. The first quarter of fiscal year 2016, we reported net income attributable to Asta Funding, Inc. of $1,806,000 or $0.15 per diluted share as compared to reported net income of $370,000 or $0.03 per diluted share for the first quarter of fiscal year 2015.

Net income before non-controlling interest increased $2 million to $2,335,000 from $321,000 from the prior year, largely the result of increased revenues across all lines of business and lower general and administrative expenses. Company reported total income for the first quarter of fiscal year 2016 of $12,335,000 as compared to $10,462,000 reported for the first quarter of fiscal year 2015, a 17.9% increase over the prior year.

Income increased in all business segments in the first quarter of fiscal year 2016 as compared to the first quarter of fiscal year 2015. Finance income on consumer receivables is $5,142,000 for the first quarter as compared to $5,037,000 in the first quarter of the prior year.

Income from personal injury claims was $3,085,000 as compared to $2,488,000, an increase of 23.9% over the prior year. Income on structured settlements was $2,934,000 as compared $2,143,000, an increase of 36.9%. Income in the disability segment increased $500,000 to $659,000 from $159,000 from the prior year first quarter.

Net cash collections on consumer receivables for the quarter ended December 31, 2015, totaled $7,293,000. This compares to the prior year total net collections of $8,750,000. Net cash collections on the Great Seneca portfolio was $1,718,000 as compared to $2,286,000 in the first quarter of fiscal year 2015.

Carrying value of the Great Seneca portfolio at December 31, 2015, was $8.8 million as compared to $17 million at December 31, 2014. As Gary previously mentioned, we invested approximately $4.4 million in consumer receivables in the international sector in the first quarter of fiscal year 2016. There were no consumer receivable acquisitions in the first quarter of fiscal year 2015.

Company invested approximately $7 million in personal injury cases during the first quarter of fiscal year 2016 as compared to $6.3 million in the first quarter of the prior year. Investment in structured settlements were approximately $4.2 million in the first quarter as compared to $3.1 million in the same period of the prior year.

General and administrative expenses for the first quarter of fiscal year 2016 were $8,239,000 as compared to $9,554,000 for the first quarter of fiscal year 2015. General and administrative expenses decreased primarily due to lower loss reserves related to personal injury claims.

In addition, at the corporate level, professional fees and consulting fees decreased as compared to the prior year. These decreases were partially offset by increased investments and continued growth of the disability segment, GAR Disability Advocates LLC. Fees on disability cases are generally in between 18 and 24 months after the case is assigned.

Interest expense was $728,000 in the first quarter of fiscal year 2016 as compared to $489,000 reported in the first quarter of fiscal year 2015. The increase in interest expense is related to our growth of our structured settlement business segment. Our invested balance in structured settlement has increased over 50% since December 31, 2014.

As Gary mentioned, we did acquire the 20% interest in CBC Settlement Funding we did not already own. CBC has been very successful since we originally invested in the company in December of 2013, and going forward Asta Funding will benefit 100% from the ongoing results. We look forward to the business segment's continued success.

Company repurchased 834,000 shares of Asta Funding common stock during the quarter ended December 31, 2015. The total repurchased shares since the inception of the most recent share buyback program is 1,035,800 shares. The book value per share at December 31, 2015, was $14.49.

This concludes my remarks on the financial results. 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

[Operator Instructions] And our first question comes from the line of Philip Lee with Mangrove Partners.

Nathaniel August

It's Nathaniel on for Philip. I have a few questions for you, and hopefully you'll allow me to go over the one question limit, since we're your largest shareholder.

Our first question would be, if you can elaborate a little bit on the types of strategic acquisitions or other types of investments that you mentioned out in your prepared remarks? And specifically, what you're looking for, from both a qualitative and quantitative perspective as well as the potential size that acquisition or investment could reach?

Gary Stern

We're looking for acquisitions in financial services area and we're probably very broad as far as our position area in financial services. And we really most likely would not invest more than $25 million or $30 million of our own cash in any one acquisition. And if we had to leverage that with some non-recourse debt to the parents, we would certainly consider that, but we want to be err on the side of caution as far as investing all of our cash that's available. So easier said than done, but we are looking for that.

Nathaniel August

And is there anything more that you can tell me either quantitatively or qualitatively about what you're looking forward in investments?

Gary Stern

Not really. I mean, we've don't comment on that, but we're out there looking, but we're being very careful and there is a lot of money chasing deals, I'm sure you're aware of that. So we're well into it. I would add that if the company is distressed and we feel that company could be turned around, we would look at that. And we're at the opposite end of the spectrum, if we see a company that's performing very well and see some upside potential and growth with good management, we would look at that as well. So we're really not limiting ourselves too much.

Nathaniel August

And my next question would be with regards to your disability business, it's encouraging to see that the revenues are starting to grow there. Do you have any balance sheet value for that business, meaning, that have you been capitalizing any of the cost of incubating and building that business or is all of that's been running through the P&L?

Robert Michel

There's no capitalized cost in that, because it's a fee-based business.

Nathaniel August

And then turning to the Great Seneca portfolio, I know that you struck or restruck your agreement with Bank of Montreal a while back. Have you started to realize the cash flow off of that portfolio? And if not, can you tell us when you expect it to start realize that?

Robert Michel

Well, we have been realizing the cash flow of the portfolio. And in within the next, just estimating six to nine months, we will be then sharing the collections with Bank of Montreal. We have been accumulating 1% of those collections for quite a while now.

Nathaniel August

And with regards to your income tax receivable as a result of your settlement with [ph] the service, when do you expect that to turn into cash?

Gary Stern

Again, we have approximately [technical difficulty] of prepaid taxes and receivables. We are looking at for the next one to two years to three years. That's based on the $13 million that we paid that [technical difficulty] prepaid tax amount.

Nathaniel August

And then, my final question is that you booked a reasonably large expense for non-controlling interest this quarter. Was that entirely related to CBC or were there other parts to that?

Robert Michel

It's the Pegasus portion that was a successful quarter.

Nathaniel August

Could you break that down between CBC and Pegasus for me?

Robert Michel

If you could hold on for, I can give you an estimate. Well, most of it was -- Nathaniel, let me get back to you on the exact breakdown. I don't want to --

Nathaniel August

No problem at all. Thank you very much.

Robert Michel

I can get back to you on that.

Operator

And our next question comes from the line of Gregg Hillman with First Wilshire Securities Management.

Gregg Hillman

First of all, for CBC that line in the income statement for your net income attributable to non-controlling interest of $529,000. What percentage of that was the 20% of the CBC you did now?

Robert Michel

Well, that's from the previous question that I am going to, just to get to split the details.

Gregg Hillman

And then in terms of the interest on the CBC debt, I was wondering what the interest of -- I think one worked just to the securitization, like it was a blended rate maybe around 5%. And I was wondering if it makes sense for CBC to do securitization versus what the interest rate they're paying right now?

William Skyrm

Right now our most efficient interest rate is on our warehouse facility. However that is a variable rate, so our finance model is to -- periodically we do private placement, we don't call it a securitization, because it's not a rated deal. The counterparties that purchase it don't require that, but we do periodically clear out our warehouse, issue a private placement with a fixed interest rate, and our last transaction in 2015 was at 5.07%.

Gregg Hillman

And then what's the blended rate for your entire, kind of, the $46 million of non-recourse debt or $55 million in debt total, what's the blended rate on that right now for the whole thing?

William Skyrm

Yes, I mean that moves around daily, because it would be a blend of both our warehouse balance, as well as the private placements that we have issued since 2009, so it's a blend. I can tell you that some of early private placements were smaller in size and had a slightly larger interest rate. And each private placement that we have issued since inception has improved rate wise. And I think that's a blend.

It's in part because of whatever the prevailing market rates are, but it's also the premium that our investors command over the benchmark rates, typically the tenure rates. And as CBC has grown and produced quality assets that have performed, the investing community has -- the premium they demand over the tenure has contracted.

Gregg Hillman

And a follow-up, Bill. This is for Bill, I take it that your structured settlement is a mature market, but you continue to grow. How are you able to continue to grow at a fairly decent rate in a market that's pretty mature?

William Skyrm

Well, we don't make any forward statements, but I can tell you historically that CBC has maintained a low-cost structure and we have invested heavily in systems to keep us operating in a very efficient way. And we also have a very diverse mix of marketing channels and we've been effective at being able to market and produce leads and opportunities efficiently. I don't know how that [ph] stacks up to our competitors, because I don't know their businesses, but I think those are two key points that have helped CBC grow and gain market share over the years.

Gregg Hillman

And then finally, Garry, on the disability business, the GAR business, there is a new law passed, with the budget that was passed that made it hard to get disability. So exactly what would suggest to lap that law and does it affect you in any way?

Gary Stern

You are talking about -- I have to ask Ricky who is the CEO, but I don't think it's going to affect us negatively. I haven't heard anything from him that would negatively impact this. The Social Security Administration has delayed pay on their claims a little bit, but that's a double-edged sword, because if they delay the payment, most likely it would be higher with a cap of $600,000. So I will get back to you or Ricky will get back to you. I'll double check that. But I haven't heard anything that would impact us negatively with the exception of what I just said that there's a little bit of the delay in the negative payments.

Robert Michel

Again, just want to follow-up on the questions for both the previous callers that the Pegasus split was $373,000 and the CBC piece was $156,000. And as previously mentioned, going forward, we at Asta will have the benefit of 100% of the results.

Operator

And our next question comes from line of Robert Balopole with Balopole Management.

Robert Balopole

I just had a question about the structured settlements. It looks like the asset is just under $70 million. Can you tell me how much of that amount is securitized?

William Skyrm

Yes, this is Bill again from CBC. Roughly, at this time -- and again, the warehouse balance is moving on a very regular basis, but roughly $60 million of the $70 million of present value is currently securitize are under private placement with a fixed rate, so there is no -- we're not subject to moves in rise within interest rate going forward.

Robert Balopole

So I can't really look at the liability, the non-recourse notes and drive the amount of securitization just from comparing that to the amount of the asset?

William Skyrm

I don't think there is the detail in the financial statements that break out each private placement and each warehouse. Bob, I don't know if you have that in front of you?

Robert Michel

The total, including the line of credit of each of the securitizations is almost $56 million. There is approximately $10 million in the warehouse line of credit.

Robert Balopole

So that amount of liability, the $56 million is basically equivalent to the amount of structured settlements that are securitized?

William Skyrm

Yes, just for the retained interest portion that comes back to the company.

Robert Balopole

And one more question about this line item unrealized gains on structured settlements that income comes in at the time you securitize. Is that correct?

William Skyrm

Not exactly, the way the revenue is recognized from the structured settlement is, for each period we have cash collections, right, coming in each day, each month into the lock-box. So of the collections, there is a portion of that that's attributable to interest and then there is a portion of it that is principal. And so the interest component on the collections is what makes up the interest income from structured settlements. The unrealized gains is the difference between our basis in all the originations and the market value of those future receivables. So it's not the collection, it's what's left, the market present value of the uncollected receivables that are due in the future.

Robert Balopole

So are those mark-to-market every quarter?

William Skyrm

On a monthly basis.

Robert Balopole

And the reason it's called unrealized gain is it is still subject to some issues as time goes by?

William Skyrm

No, it's the difference between the acquisition cost the CBC pays for our future cash flow and what the market rate is or where we can securitize.

Robert Balopole

And one last question, if I may, this is on the income tax expense, which is about $1 million. I guess, most of that is non-cash, because I see your prepaid taxes declined by about $900,000, so does that mean you only paid about $100,000 in cash taxes during the quarter?

Robert Michel

There could be other nuances to that, but we are not in a cash paying position of taxes based on the NOLs in the state of New Jersey, which is most of where our state tax nexus is and the federal position being in a receivable position, so.

Operator

Thank you. And I'm showing no further questions at this time. I would now like to turn the call back to Mr. Gary Sterns for closing remarks.

End of Q&A

Gary Stern

Thank you for participating in our first quarter fiscal year 2016 conference call. As always should you have any additional questions, please feel free to call Bob and myself. Have a great day.

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