Financial Federal Corporation F1Q08 (Qtr End 10/31/2007) Earnings Call Transcript

Dec. 5.07 | About: First Trust (FIF)

Financial Federal Corporation (NYSE:FIF)

F1Q08 Earnings Call

December 5, 2007 11:00 am ET

Executives

Paul R. Sinsheimer – Chairman of the Board, President &Chief Executive Officer

Steven F. Groth – Chief Financial Officer

David H. Hamm – Vice President, Treasurer & Controller

Analysts

Robert Napoli – Piper Jaffray

John Hecht – JMP Securities

Carl Drake – SunTrust Robinson Humphrey, Inc.

Scott Valentine – FBR Capital Markets

Sameer Gokhale – Keefe, Bruyette & Woods

Henry J. Coffey – Ferris, Baker Watts, Inc.

Gerry Heffernan – Lord Abbott

[Matt Weatherby – MA Weatherby & Company]

Operator

Good day ladies and gentlemen and welcome to the FirstQuarter 2008 Financial Federal Corporation Earnings Conference Call. (Operator Instructions)

This call may maintain forward looking statements within themeaning of the Private Securities Litigation Reform Act of 1995 and are subjectto risks and uncertainties that could cause actual results to differ materiallyfrom those contained in the forward looking statements. Readers are referred to the most recentreports on Forms 10K and 10Q filed by the company with the Securities andExchange Commission that identify such risks and uncertainties.

As a reminder this conference is being recorded for replaypurposes. I would now like to turn thepresentation over to your host for the day Mr. Paul Sinsheimer, CEO. Please proceed sir.

Paul R. Sinsheimer

Thank you and good morning. Thank you for attending our earnings conference call for the firstquarter ended October 31st. Iam joined by Steve Groth our CFO and David Hamm our Controller. I will briefly discuss our first quarterresults and business trends. I’ll then ask Steve to discuss liquidity andfinally we will take questions from participants.

Diluted earnings per share were $0.50 for the quarter, thesame as last quarter and 9% higher than the first quarter of fiscal 2007. Net income for the first quarter was $12.7million 3% higher than reported in the first quarter of fiscal 2007. Originations for the quarter were $259million compared to $297 million last quarter and $320 million in fiscalquarter 2007. Finance receivablesoutstanding were about the same as the previous quarter. The yield for the quarter was 9.28% up from9.25% from last quarter and then 9.21% in the first quarter of fiscal2007. The net interest margin increasedto 5.15% from 5.08% in the last quarter and 5.11% in the first quarter fiscal2007. Expenses increased to $6.5million from $6.1 million in the first quarter fiscal 2007 and were roughlyunchanged from last quarter.

For the quarter the expense ration was 1.2%, the efficiencyratio was 23.7% compared to last quarters rations of 1.21% and 23.8%. This performance resulted in a 13% return onequity and a 4.3 debt to equity ration. Net charge offs were $372,000 in the quarter compared to $123,000 in thelast quarter and $53,000 in the first quarter fiscal 2007. Provision for credit losses was $400,000 inthe first quarter compared to no provision recorded in the first quarter2007. Non accrual receivables were 1.22%of total receivables compared to .69% in the first quarter fiscal 2007. Delinquencies were .73% compared to .35% andreposed equipment was .1% compared to .05%.

At this point I would like to turn the conversation over toSteve.

Steven F. Groth

Yeah, thanks Paul. Iwant to keep it brief here, just mention quickly our funding profile. We’ve talked about this in the past. Notwithstanding the tighter lending marketswe continue to maintain healthy liquidity levels. The flexibility we have in our debtcomponents allows us to take advantage of the most effective interest cost byproduct. We continue to borrow moreheavily under the bank commitments instead of from the unsecured CP and asset[inaudible] CP markets to take advantage of this lower funding costs. So, back to you Paul.

Paul R. Sinsheimer

Today, everything about our business is positive except forgrowth. We are financially prepared withstrong liquidity and low financial leverage. We have an outstanding and experienced organization that has operatedsuccessfully and prudently over many different economic environments. Asset quality remains strong. Finally, as I stated many times in the past,I believe we will out perform all of our competitors regardless of marketconditions. With that, I’ll leave it opento the questions.

Question-and-Answer Session

Operator

(Operator Instructions)Your first questioncomes from the line of Bob Napoli with Piper Jaffray. Please proceed.

Robert Napoli – PiperJaffray

Good morning.

Paul R. Sinsheimer

Good morning Bob.

Robert Napoli – PiperJaffray

How are you?

Paul R. Sinsheimer

Pretty good.

Robert Napoli – PiperJaffray

A couple of questions I guess. First, maybe for Steve on margins and then aquestion on credit. The Federal Reservehas cut rates by 75 basis points and they’re going to cut by another 25 or 50next week likely, yet, Libor has not acted well and, I think, maybe just giveme a refresher course on how your borrowings are affected? How much by Libor, you know, generally ifLibor spreads would normalize over the next six months it seems like you guyshave a lot of upside on the margin. Isthat right or not?

Steven F. Groth

As we’ve talked in the past, our asset liability mix, fixfloating is 55% on the floating side and that is pegged to a Libor. So, even though the feds have been droppingrates, with the turmoil and uncertainty in the markets Libor itself has anindex has gone up. If you combine thetwo of them together, it’s still a net reduction. So, over half of our debt will be impactedpositively with rate cuts and even more so if you consider that the index ofLibor and the nervousness around that would bring it down. The other thing is that if you’re looking attoday’s rates Bob, you’ll recognize that year end has pushed up the indexes forbalance sheet dressing up by the banks.

Robert Napoli – PiperJaffray

Okay.

Steven F. Groth

Does that answer your question?

Robert Napoli – PiperJaffray

Yes, pretty much. Onthe credit side, I mean, there is no, I guess on the yield, on the yield onyour assets there is, I mean while I’m sure you’d like to see upwards pressureon the yield, is there any downward pressure on the yield you’re able togenerate on the assets? I would expectwith the credit crunch at some point you would have some upward pricing power,although I don’t think I see it toda.

Paul R. Sinsheimer

I’ll take that one Bob.

Robert Napoli – PiperJaffray

Okay.

Paul R. Sinsheimer

In general, your observation is correct. It is too early to tell arithmeticallywhether our margin is going to expand because our interest rates go down. But,I do believe, or we strongly feel at this point that our margin is going toexpand. I can’t tell you whether it willbe a combination of higher rates and lower costs, or just a lot of lowercosts. Right now, the yields that we areachieving are basically where they have been for the last several months. But, I’m of the camp today that I believethat we will have more pricing power in the future than we’ve had in the past.

Robert Napoli – PiperJaffray

Okay. And then, juston credit. If you look at the creditquality of this company over the long term, I mean, it’s obviously, prettyphenomenal and I think if you go back into the late 90s and you look at thereserve levels that you had and if you look at the history of this company, thereserve levels were relative to charge offs kind of ludicrous, averaging, Idon’t think the auditors would ever in this current day and age allow you tokeep reserves at that level. But, what Idon’t know, I mean your worse charge off year ever was 87 basis points. Clearly, in the US,in a credit cycle very different for different parts whether its mortgage, orcredit cards, or commercial, you know. But, I guess, the question is are the reserve levels, if your charge offwould go to the highest of all time of 87 basis points, do you need reservesdouble those charge offs? Obviously, at113 or 114.basis points of reserves that’s higher than nay charge off yearyou’ve ever had. So, how do you thinkabout the reserves and charge offs and do you think that we could, as we gothrough this credit cycle, with this credit cycle look like the 03-04 creditcycle where asset values were plummeting, or not?

Paul R. Sinsheimer

Well, there were a lot of question in there Bob.

Robert Napoli – PiperJaffray

Sorry.

Paul R. Sinsheimer

If I fail to answer remind me. I want to take the last one about what isdifferent today in terms of asset values than we experienced in 02-03. Today, there is an infrastructure buildingboom in the world. And, the assets thatwe are financing have demand outside of the United States. That, together with a dollar that is very weak, reduces economiccircumstances where foreign buyers like to come to this country and buy theassets at what they believe are bargain basement prices. It’s no different than what you read in thenewspaper where people from Europe are coming to Fifth Avenue here in New Yorkto do their Christmas shopping because of the imbalance in currencyvalues. We are enjoying that same typebenefit on our collateral values. Thatwas exactly the reverse in 02 and 03 when the dollar was terribly strong relativeto other currencies and, in fact, there were no foreign buyers because theequipment was cheaper in their own currency than coming to this country. Dramatic difference, or at least a dramaticdifference we believe.

The other thing that I’ll tell you is the overall creditquality of our obligors is better today than it was in the 02-03 arena. And, as a statistical side bar, when weentered the 02-03 period 15% of our assets at that point where in the manufacturingsector. And, what we learned about the02-03 period was that 40% of our losses during that period came from 15% of ourportfolio, or the manufacturing sector. Today, we have reduced our exposure to that sector to less than 1%. And so, even if losses were to be on someform of equivalent bases to 02 and 03, if you’re in the projection business,they shouldn’t be any higher than 60% of .87. If you understand the math I just gave you.

As to the formula itself, accounting policies were much moreliberal in the 90s than they are in this decade. And, you’re correct, it would be verydifficult for us to sustain a reserve approaching 170 basis points based uponthe history of the company. I will tellyou that you are correct, I believe, in your 87 basis points as it being ourworse. I believe that we have averagedin the low 20 basis points since we started the business. And, in fact, when I did start the businesswe projected 30-35 basis points was what we considered a normalized lossexperience. But, more specifically towhere the reserve is today, the reserve, the expectation of higher futurelosses is factored in to the current allowance determination and therefore,future increase in those losses would not necessarily translate into needing toincrease the allowance. Now, if losses getto 100 basis points, of course, the allowance is going to have to go up. We do not see that occurring today. Asset quality remains very, very good. And, it would take a sustained period oflosses to get far and above where we are currently experiencing to ever get itup over where it currently resides. There is the expectation of higher future losses is already built intothe portfolio. We’ve had one basis pointin losses for our last two fiscal years with 113 basis points of a reserve forbad debt, it is, they are already contained in that number. Did I get your answer?

Robert Napoli – PiperJaffray

Yes you did. Thankyou very much.

Paul R. Sinsheimer

Thanks Bob.

Operator

Your next question comes from the line of John Hecht. Please proceed.

John Hecht – JMPSecurities

Yes. Morning andthanks for taking my questions.

Paul R. Sinsheimer

Good morning John.

John Hecht – JMPSecurities

Good morning. Iwonder if you could discuss the health of the individual business lines goingf5rom a regional perspective trucking, waste and the construction segments?

Paul R. Sinsheimer

Pretty easier here. Transportation is very difficult, the sale of new assets is not only lowbut, lower than anticipated. Obviously,I don’t think that problem is unique to us. When you read the public statements made by the manufacturers. What’s unique about that is thatnotwithstanding the fact the lower demand for new trucks, the current valuationon used trucks remains firm in relation to that reduced demand. That generally doesn’t go that way. Generally collateral values within anindustry will move down as demand for new assets move down. So, we haven’t seen that yet. Construction remains good but, it is, Ithink, the contracting community is like the rest of the community, they areassessing the impact of what they read in the newspapers, hear on the TV and,you know, the appetite for risk is probably not as strong today as it was sixmonths ago. I think there’s a pauseoccurring in the USeconomy as each of us assesses the impact of the credit turmoil and the capitalmarkets. The determination of how itaffects each of us. I think, that iswhat is going on in the construction business. The waste business, the waste business goes on regardless of whether theDow hits 20,000 or 2,000. We don’t seeanything from the current environment affecting the waste business.

John Hecht – JMPSecurities

Okay. If I rememberright, about a year and a half ago there was a tax incentive, maybe a littlebit longer now, a tax incentive program that caused a sort of pull forward oforders in the trucking community. Isthere any other tax incentive programs out there that whether in trucking orconstruction that would cause that type of activity? Maybe pull forward some purchasing activityto help financing lines to get started again?

Paul R. Sinsheimer

John, I’m not readily aware if there were tax incentives,there were emission.

John Hecht – JMPSecurities

Excuse me, emission incentives.

Paul R. Sinsheimer

There were emission control incentives that raised the priceof a truck and in some cases affected fuel efficiency and that, I believe, iswhat made 06 an outstanding year and 07 somewhat less stellar. The affects of that seem to be magnified tosome degree by a slow in the economy. There just doesn’t seem to be the demand for new units that we expectedto have kicked in the second half of 07. You know, from what I read and what I hear, you know, my best guess is,notwithstanding what happens in the general economy, we’ll see a return to normalancyin the first part of 08.

John Hecht – JMPSecurities

Okay. And then, I guess, obviously delinquency and nonperformers are coming off at very low levels and I guess, we could just expecta normalization of that. But, given thechange in quarter-to-quarter levels is that related to any particular type ofcustomer industry? Or, is that just sortof small customers across the board?

Paul R. Sinsheimer

There’s nothing in there that catches my eye other than, andI know I sound like a broken record here, we’re coming off some absurdly lowlevels of losses and non accruals and delinquencies. I have never seen anything like it in my 35plus years in the business. They had toget worse. I hate using that term but,it is accurate, they are worse but, they are not bad and we are very confidentof the credit quality in the portfolios as we see it today.

John Hecht – JMPSecurities

Okay. And lastquestion, Steven, you mentioned 55% as a ration in comparison fixed versusfloating. Is that just theliabilities? Or, is that just some otherration?

Steven F. Groth

No. Actually, that’sa good point and in our Qs we reference straight debt is 55% of floating, 45%fixed and when you put in the non interest bearing equity you then flip it andit is 55 fixed 45 floating.

John Hecht – JMPSecurities

Okay.

Steven F. Groth

There’s two ways to look at it. One would be straight debt and the otherwould be on a capitalization.

John Hecht – JMPSecurities

Okay. Wonderful. Thanks very much guys.

Paul R. Sinsheimer

Thank you John.

Operator

Your next question comes from the line of Carl Drake with SunTrustRobinson Humphrey. Please proceed.

Carl Drake – SunTrustRobinson Humphrey, Inc.

Good morning.

Paul R. Sinsheimer

Good morning Carl.

Carl Drake – SunTrustRobinson Humphrey, Inc.

Paul, I was wondering if you could elaborate a little biton, you know, given the strong equipment pricing environment we’ve had for thepast several years, the global infrastructure boom, can you look at yourportfolio and look at loan to value and look at that versus the last down turnand say that, you know, I think you’ve made these comments broadly that you’rein much better shape. But, is there anyway to quantify that because, just looking at you’re making amortizing loans onassets that have been appreciating, you’re probably in good shape from aloan-to-value standpoint. But, just if there’s any clarity or quantificationyou can provide on the portfolio that would be great.

Steven F. Groth

Quantification would be very, very difficult. I think what you have seen and what we saw inthe previous quarter and believe we will continue to see in the near term, itwill ultimately result in higher losses. Simply put, when the asset value is greater than the net present valueof the loan, if there’s a default associated with that circumstance, what wewill see is a prepayment. When the assetis worth more than the present value of the loan. When the reverse of that is true, that is theloan has a higher balance than the value of the collateral, you’ll see arepossession, you’ll see owned assets and you’ll find that we are experiencinglosses.

Carl Drake – SunTrustRobinson Humphrey, Inc.

Do you have any particular assets that have not had goodappreciation over the years? If youcould quantify the percentage of the portfolio, would that be, you know,perhaps cranes have been very strong, are there certain areas of the truckingside that may have not had as good appreciation?

Steven F. Groth

Well, let me clarify one thing there. Cranes have appreciated in values. The other assets depreciation in value but,what has happened is they haven’t depreciated as fast as one would expect. The only asset class I can sit here thinkingoff the top of my head that has experienced appreciation is the crane business.

Carl Drake – SunTrustRobinson Humphrey, Inc.

Okay.

Steven F. Groth

Other assets just aren’t moving down as fast.

Paul R. Sinsheimer

That’s based on age.

Steven F. Groth

And, that’s based upon use and age.

Carl Drake – SunTrustRobinson Humphrey, Inc.

Okay.

Steven F. Groth

And, what was the other question?

Carl Drake – SunTrustRobinson Humphrey, Inc.

That’s helpful. Justtrying to get some clarity there. But,say you would expect repayments, perhaps to slow as, you know, the assetsvalues might weaken somewhat.

Steven F. Groth

To the extent, I don’t want to mislead you here. My comment was to the extent the loan was indefault and the asset value was greater than the loan value, we’d seeprepayments because the asset had sold. In fact, we may never even see the delinquency because the borrower seeswhat is happening and doesn’t want to be in default. He just sells the asset and we’ve got aprepayment. That’s always the best ofall worlds for us and when it turns in the other direction it becomes the worstof all worlds which is what we experienced several years ago.

Carl Drake – SunTrustRobinson Humphrey, Inc.

Right. But, as theeconomy does slow you would expect some, you know, the demand for usedequipment perhaps to decline which could cause, you know, fewer repayments.

Steven F. Groth

Absolutely correct but, keep in mind that as our economy isslowing and there’s more assets available for sale they are now being sold tobuyers outside of the economy that is slowing, i.e. the world where economies are expanding have become thepurchasers of these assets. Had thisoccurred in a different time 20 years ago or 30 years ago where that factor wasnot present we would have had reduced equipment values.

Carl Drake – SunTrustRobinson Humphrey, Inc.

Okay. Paul, on growththe year-over-year top line originations were down, I get that. But, I think that was a pretty difficultcomparison a year ago. We wouldn’texpect to see that type of year-over-year decline in the top line originationswould we going forward? Because, thingsare starting to slow into last year?

Paul R. Sinsheimer

Do you want to give me that question again Carl?

Carl Drake – SunTrustRobinson Humphrey, Inc.

Well, looking at the top line originations a year ago, theoriginations were down double digits. You know, you wouldn’t expect to have that same decline, those compsgoing forward because growth slowed throughout last year. I was just wondering if you could give some,talk about the guidance in terms of where you think originations might fallout?

Paul R. Sinsheimer

That’s a tough one because a large part is probablydependent on the economy, your view of the general economy would be a governorof my response. But, I will add somecolor to the extent that Carl, you’ve know us a long time and several othersthat are on this call have known us a long time. We view ourselves as disciplinedlenders. We’re not, we don’t viewourselves as chasers of volume of reducing underwriting standards where othersare more focused on next week’s results. Too many competitors I read in the newspaper today where you’re hearingabout their massive right offs on loans that had no margins, had nounderwriting, had no credit, had no documentation, had no financialstatements. We run our business a littlebit differently than those gentlemen run their businesses. We don’t find ourselves in the capital markettoday trying to raise equity at absurdly high rates so we can turn around andlending it at lower rates. That requiresdisciplined. We are disciplined andwe’re not prone to chasing as other lenders seem to view life differently. I can assure you that we will do our best toremain focused on the ball that’s in front of us.

Carl Drake – SunTrustRobinson Humphrey, Inc.

Okay. Last questionon the buy back of the stock in the quarter. I think you still have, maybe $35 million remaining on yourauthorization?

Paul R. Sinsheimer

I think it’s a little higher than that. What is it $33 million? Yes. $33 million I’ve been told.

Carl Drake – SunTrustRobinson Humphrey, Inc.

Okay. And, would youexpect to be opportunistic there going forward?

Paul R. Sinsheimer

We view our selves as being opportunistic. That is a subject that is reviewed regularlyby the board. We have a board meet, wehave our shareholders and board meeting coming up next week, it will beaddressed then but, we do tend to view our selves as opportunists.

Carl Drake – SunTrustRobinson Humphrey, Inc.

Okay. Thank you somuch.

Paul R. Sinsheimer

Thank you Carl.

Operator

Your next question comes from the line of Scott Valentinewith FBR Capital Markets. Pleaseproceed.

Scott Valentine – FBRCapital Markets

Good morning. Thanksfor taking my question. I just want tofollow up on an earlier statement about the liquidity you guys are doing onyour bank lines to pay off some CP and ABCP. It was a funding cost issue, the bank lines were cheaper. Is the CP and ABCP still available to you ifyou needed it?

Steven F. Groth

The commercial paper, the unsecured commercial paper is justbased on a pricing mechanism. We go inand we opportunistically look everyday at what those rates are. We’re still being quoted prices but, as youwould guess, with the turmoil in the market they’re higher than the bank linewith their spread. On the, so we arebeing quoted on the unsecured line. Onthe secured CP through the conduits, we still have full liquidity. They’re fully committed and backed by thebanks, Bank of America, Citi, Duetche, West LB. So, there’s been no disruption at all with that, it’s only been apricing issues.

Scott Valentine – FBRCapital Markets

Okay.

Steven F. Groth

They’re still fully committed.

Scott Valentine – FBRCapital Markets

That’s very helpful. And then, on the credit quality, I guess, people see the constructionexposure and get nervous but, it’s mostly commercial construction, Ibelieve. I was wondering, do you have afurther break down? I mean, I assumeit’s probably industrial parks, strip malls, things like that. Not really high rise buildings or any thinglike that. Can you give more color onwhat exactly the commercial real estate construction is?

Paul R. Sinsheimer

I’m not sure I understand your question Carl. What color are you looking for.

Scott Valentine – FBRCapital Markets

Just more color on what your borrowers in the commercialconstruction segment, what types of properties do they develop?

Paul R. Sinsheimer

It runs the gamut from what you suggested. From, you know, parking garages, sitepreparation, strip malls, [inaudible], regular infrastructure work, it’s prettymuch generic.

Scott Valentine – FBRCapital Markets

Okay. Then, followingup on one of Carl’s questions, on the growth issue. It sounds like, I mean, you’ve always beenvery disciplined and we expect that going forward. The slowing growth, does that reflect lessdemand from borrowers? Or, is it acombination of demand and just you guys getting a little bit more disciplinedon the underwriting?

Paul R. Sinsheimer

Mostly slower demand.

Scott Valentine – FBRCapital Markets

Okay. Thanks very much.

Operator

Your next question comes from Sameer Gokhale with KBW. Please proceed.

Sameer Gokhale –Keefe, Bruyette & Woods

Hi. Goodmorning. I had a few questionshere. The first one was, you know, Ithink Caterpillar when they had announced their results they struck a verycautious note on the business but then, a few weeks later, I think, John Deerehad their call and they seemed to be more upbeat relative to Caterpillar. I was wondering if you had any thoughts, ifyou had a chance to listen to their commentary and if maybe you had seen differenceperhaps in the values of your equipment by manufacturer? I think, you’ve talked about it in the pastbut, if you could just revisit that issue, if you don’t mind.

Paul R. Sinsheimer

Sure. I’ll try mybest, several what I perceive as unrelated questions. John Deere and Caterpillar make some of thebest construction equipment that we finance and they're at that values on thehistorical basis have not changed, or at least to my knowledge in the recentpast. I did not listen to the calls thatyou mentioned but, I would give you this observation and I’m shooting somewhatfrom the hip and that is John Deere is more, as I understand it, is as agreater percentage of their focus on the agricultural business than Caterpillardoes.

Sameer Gokhale –Keefe, Bruyette & Woods

That is right. But, Ithink they had made some positive comments in the non agri business aswell. But, you are right.

Paul R. Sinsheimer

Okay. But, since Idid not hear the call, I would have guessed that their outlook was morepositive because of that agricultural issue. I would have no comments otherwise.

Sameer Gokhale –Keefe, Bruyette & Woods

Okay. That’shelpful. The other thing I wanted toask you was, you know, I think there’s been several questions asked aboutgrowth and the margin and credit. But,you know, what I was curious about was historically you’ve maintained this mixof largely variable funding relative to your lending portfolio which is a fixedrate and you clearly have an interest rate element there and I know you’vetalked about the portfolio life and it’s relatively short so, it’s worth takingthat risk. But, if you look out the nextyear or two and credit quality directionally maybe were likely to get worseopposed to better, the operating environment in terms of loan growth is likelyto remain challenged maybe over that time period. Would it be prudent at this juncture fromyour perspective to eliminate one of the legs of the uncertainty which is themargin issue? You see a benefitpotentially in the near term with the fed funds rate coming down but, from thatlevel if you see an increase in rate at some point in time, wouldn’t it beprudent to eliminate that one leg of the uncertainty? How would you think about that? Has your thinking changed at all in thatregard?

Paul R. Sinsheimer

Well, let me say this to you Sameer, what you’re discussingis what as managers we try to avoid and that is guessing interest rate as partof, an integral part of our business. Left to our own devices and now, I’m commenting in the theoreticalworld, not the real world, we would borrow all of our money overnight and justtake the market as it comes knowing that over a period of time we wouldprobably be neither winners nor losers. But, the world doesn’t operate that way. The credit community likes to see a portion of our debt profile fixedand we’ve tried to balance that need in our capital structure. So, you know, we don’t try to gain the systemand we don’t view it as such. We have treasury locks in the past on a veryshort term basis. But, other than thatwe have not really played in that arena.

Sameer Gokhale –Keefe, Bruyette & Woods

Perhaps I’m not understanding something here. But, if interest rates do rise at some pointPaul, that affects your funding costs because they are mostly variable ratescompared to what you’re lending at. So,in a certain sense wouldn’t it be safer to, in fact, hedge that risk outbecause then you don’t have to worry about that part of the equation goingforward from that standpoint.

Paul R. Sinsheimer

In theory, you are correct. But, when interest rates start to move up, and generally they move upall along the scale and that premium we would have to pay as a borrower would,at least historically, has been very unappealing. But, once again, we go back to the fact thatour portfolio turns very, very quickly and we believe that our ability tore-price is sufficient to mitigate that risk.

Sameer Gokhale –Keefe, Bruyette & Woods

Okay. That’s helpfulPaul. Then, another question I had wason the capital levels. I know in thepast and you just mentioned that you have a board meeting coming up and that’swhere you’ll maybe, perhaps discuss the whole issue of share buy back. But, what is your view currently as far as,you know, entering into maybe and even more challenging environment from amacro economics standpoint in the US. Has the view traditionally been, or is it nowlet’s hold on to the excess capital if at some point when the economy doesrecover, if our stock price does improve then we’ll jump in with aggressive buybacks and we’ll maintain the additional capital and liquidity now? Or, would it be more like let’s beopportunistic and the stocks cheap, let’s jump in now. And, how would you think about that.

Paul R. Sinsheimer

You’ve articulated the question extremely well Sameer but,that is the question we face.

Sameer Gokhale –Keefe, Bruyette & Woods

Okay.

Paul R. Sinsheimer

Which is a balancing of our stock price, our liquidity, thefuture opportunity for additional liquidity, market perception, shareholderexpectation, there’s a host of factors here. But, I will comment that on at least a price to book basis and our bookis fully tangible we are trading at or very near historic lows.

Sameer Gokhale –Keefe, Bruyette & Woods

Okay. That’s reallyhelpful. And then, just the lastquestion I had was more just on the share count issue. Perhaps Steven can address that. Your average share count, I think, increaseda little bit compared to the last quarter, yet you had a buy back. Was that just the factoring of someadditional options and the like into the share average to the share count?

Steven F. Groth

Well, we actually had a stock grant during the quarter but,with the buy backs that have been happening during the summer, the stock countis actually lower. You didn’t get thefull affect of the buy back because they were done near the end of the quarter.

Sameer Gokhale –Keefe, Bruyette & Woods

Okay. So, it’s just atiming difference in the averages.

Steven F. Groth

Yeah.

Sameer Gokhale –Keefe, Bruyette & Woods

Okay. That’shelpful. Thanks a lot guys.

Operator

Your next question comes from the line of Henry Coffey withFerris, Baker Watts, Inc. Please proceed

Henry J. Coffey –Ferris, Baker Watts, Inc.

Hey Paul. Yeah, I’dlike you to answer all those question about your economic outlook. Getting more serious, frankly Paul, I’venever heard you be more sort of positive about your own confidence in yourasset values. It appears that cranes areholding up, construction equipment you said is depreciating less quickly, thetrucks are holding value. How big of afactor is this role of we’ll call in the foreign buyer? Have you started to see transactions on thatlevel yet? Or, is that more of ananticipation?

Paul R. Sinsheimer

We’ve seen a little of it already and, you know, ourcontacts in the field, not only with the sellers of the equipment butauctioneers of equipment have indicated that not only is the internationalpresence meaningful, it is very vibrant today and expectations are for that tocontinue. Especially, as long as thedollar remains as cheap as it is.

Henry J. Coffey –Ferris, Baker Watts, Inc.

And, looking at your portfolio mix, it’s yellow metal,cranes, trucks and a very small sliver of machines. Does that cover most of it?

Paul R. Sinsheimer

You were doing a disservice. That sliver of machine tools is less than 1%.

Henry J. Coffey –Ferris, Baker Watts, Inc.

A splinter of a sliver.

Paul R. Sinsheimer

A sliver of a sliver. Okay, I’ll buy that.

Steven F. Groth

You didn’t mention the waste.

Henry J. Coffey –Ferris, Baker Watts, Inc.

Yeah and dump trucks. And, in each one of those categories can you give us a quick run down interms of where you think collateral values are holding and how this foreignbuyer plays in and whether it’s a foreign or domestic?

Paul R. Sinsheimer

I’m going to try that one. First of all, the assets that are used to hang iron, move dirt, dig dirtare the same in Dallas Texas thatthey are in Peking. There are two variables to the foreign buyer. One is his currency cost, the other were theactual cost of the asset and the cost to move it from, in this case Dallasto Peking. Thevariables to that remain very positive for USdomestic collateral values.

Henry J. Coffey –Ferris, Baker Watts, Inc.

Yellow metal and cranes?

Paul R. Sinsheimer

Yeah. And, trucks,really I don’t, there are some trucks that will be sold in this hemisphere to South America, Mexico, Central America and the like but, you generally don’t see trucks movingacross the ocean. The cost per unit andthe cost for freight make that dynamic disadvantageous. Trucks is the outlier there. Truck values remain very firm relative to theweek demand for new ones. You know, Ican hypothecate with you on that subject and suggest that manufactures havemaintained better inventory control, anticipated this, are able to shiftproduction outside and sell it outside the US. We can round up a lot of suspects in thatregard.

Henry J. Coffey – Ferris,Baker Watts, Inc.

Yeah. We saw the samething with equipment a couple of years ago as the supply got too tight.

Paul R. Sinsheimer

I’m sorry, say that again Henry.

Henry J. Coffey –Ferris, Baker Watts, Inc.

Supply got really tight just because the manufacturers weren’t holding a lot ofinventory.

Paul R. Sinsheimer

They did get tight and manufacturers have remained, theyweren’t as quick to satiate that demand several years ago as they historicallywere.

Henry J. Coffey –Ferris, Baker Watts, Inc.

Okay. Well, this ishelpful and, you know, obviously, you have a lot to think about on the buy backfront but, can you give us a number that says, “This is the level of equitycapital we need to see in the equation to keep our other lenders happy.” How [inaudible] do you have in terms ofreducing capital rations.

Paul R. Sinsheimer

I’m sorry. Say thatlast one again Henry.

Henry J. Coffey –Ferris, Baker Watts, Inc.

How much flexibility do you have in terms of increasingleverage and lowering your equity to asset ration?

Paul R. Sinsheimer

You know, that is a moving target with many moving pieces inthere and I know I’m going to be repetitive here but, I think it’simportant. When we started the business5:1 was the sweet spot. Times changedsince then and we took the leverage lower. It is a subject that we constantly review. It is a subject we are sensitive to but, Iwill remind Henry and everyone else that managers are owners of the stock andshare the same concerns as other shareholders. We try to balance the positives and the negatives and come up with anappropriate answer.

Henry J. Coffey –Ferris, Baker Watts, Inc.

Can we read anything from your initial comments in theearnings release? Is this the businessyear where you’re going to keep supporting 8-9% share growth?

Paul R. Sinsheimer

That’s a little bit too forward looking for me.

Henry J. Coffey –Ferris, Baker Watts, Inc.

I know but, I tell [inaudible], Paul.

Paul R. Sinsheimer

I can tell you that if the economy performs I have noproblem with us performing. If theeconomy is worse than anticipated, your target will be a challenge.

Henry J. Coffey –Ferris, Baker Watts, Inc.

Thank you, sir.

Paul R. Sinsheimer

Thank you, Henry.

Operator

Your next question comes from the line of Gerry Heffernanwith Lord Abbott. Please proceed.

Gerry Heffernan –Lord Abbott

Steve, Paul how are you doing today?

Steven F. Groth

Good morning Gerry.

Gerry Heffernan –Lord Abbott

If we could go into the origination number a littlebit. Certainly, the number is what itis. Was any one segment in your businessoriginations more so, down more so than the others?

Steven F. Groth

Yes. Transportation.

Gerry Heffernan –Lord Abbott

Were the construction originations and waste businessoriginations flat year-over-year?

Steven F. Groth

I don’t have that hard number here. They were soft but, nothing like trucking.

Gerry Heffernan –Lord Abbott

Okay. Okay. Thank you for that. In regards to the competition, you know,certainly having talked to you guys for a long time the cycles always seem tobe that as you get further in to a strong cycle credit stands start to fall bythe wayside and more and more peripheral competitors come into the businesswhether they be the local banks, first the big banks and then the local banksand then the Tom, Dick & Harry’s. What is happening in the competition scene right now? Do you have any significant stores ofanything where you just saw people up and pull out in this last quarter wherethey’re credit markets have been a challenge?

Paul R. Sinsheimer

No. But, Gerry, Iwill tell you this and this is “intelligence” gathered from the street and thatis not the street in New York City, that is the street in general America, thereis a movement afoot by the competitors to raise rates. And, we believe they’re marketing people aregetting reacquainted with some new facts of life and that as I currently see itright now, I believe, that this will be positive event for us. Has it occurred yet? Too early to tell but, I just believe thatthis is going to happen and happen in the near term. It has to happen. You can see what our competitors areborrowing money at.

Gerry Heffernan –Lord Abbott

Well, do you want the competitors to move rates up? Or, would you rather the competitors goinsolvent?

Paul R. Sinsheimer

Gee, if I had that choice, I would just rather than them beleft, no, you know what, they can go out of business. I’m with you.

Gerry Heffernan –Lord Abbott

Very good. Lastquestion. In periods past whendelinquencies non performing shave increased, certainly your, you know,recoveries and what is actually charged off when you look back at it when allis said and done is, well, much better than anyone else in the industry. That said, during those periods however, youdo get very active in regards to your legal team and the work that goes intoachieving those numbers that you have historically. So, we see an SG&A number rise. What can we expect in that area? Have we gotten to the point where, you know,you’re talking to your head council and he’s thinking maybe we need one or twomore bodies in here now? Or, how doesthat work.

Paul R. Sinsheimer

Well Gerry, it is refreshing to speak with someone who trulyunderstands our numbers. You are righton target and what is another indicator of weakening credit quality is thehigher expenses that would become attendant with that and we have not seen yetand once again, we’re not having too many conversations on billable hoursbecause once again, we’re getting prepaid before, we’re not having torepossess. I will, you know, speak toyour point about expenses. Our expensestoday at $6-$6.5 million a quarter is pretty much where they were four years ago when the company was at $3 billion,$4 billion receivables and that number trended down as credit qualityimproved. Our legal expenses andrepossession and remarketing expenses diminished, went away or in a lot ofcases recovered. So, what you will seeif credit quality gets to Armageddon levels is a meaningfully jump in ouroperating expenses. We don’t capitalizeany of it. We right the check and itgoes to the P&L.

Gerry Heffernan –Lord Abbott

Okay. Great. Thank you very much Paul.

Paul R. Sinsheimer

Thank you, Gerry

Operator

Once again ladies and gentlemen if you wish to ask aquestion star one on your touchtone telephone. Your next question comes from the line of Bob Napoli with PiperJaffray. Please proceed.

Robert Napoli – PiperJaffray

I guess this is the longest call we’ve ever had.

Steven F. Groth

Bob, it’s always a pleasure to talk with friends.

Robert Napoli – PiperJaffray

This question has been asked a couple of ways but, I don’tthink this is totally clear. So, on thebuy back, and you have the $33 million left, you don’t need to go back to theboard to determine, you don’t have very much growth and I would expect thatyour asset growth is going to be, you’re probably going to be flat for aquarter, maybe a tiny bit of growth as you go into mid 08 before, hopefully,accelerating later. But, given that, Imean, and you’re 4.3 leverage ration, 4.4 debt equity ratio, I mean, we shouldexpect you to execute at a reasonable pace on the buy back you do haveoutstanding. And, you would go back tothe board for anything, it would be to get another authorization? Is that fair?

Steven F. Groth

Obviously, we could only buy back what the board authorizesand, I believe, your math is pretty close to be accurate that we have $33million. I have to repeat myself, again,that is a subject reviewed. Managementlikes to be in a position to take advantage of certain circumstances as theymay appear. Its’ interesting if you lookat our year end balance sheet and our first quarter balance sheet, growth wasessentially flat and our equity remained almost exactly the same and we boughtback about $11-12 million of stock, roughly 400,000 shares. So, everything looked like we kind of stoodstill except that we reduced our net share outstanding by that amount. And our leverage, all the other metrics justremained in place. You know, for a flatquarter to reduce your shares outstanding by 400,000 and still earn roughly thesame amount of money, that sounded like a pretty good quarter to me.

Robert Napoli – PiperJaffray

And, essentially, this pull back for long term investors,this pull back in the stock given that you’re buying it is a gift.

Steven F. Groth

I can’t comment on that but, to the extent that there’speople who want to sell our stock, I think all the buyers out there will try tomake them happy.

Robert Napoli – PiperJaffray

Alright. Thank you.

Steven F. Groth

Thank you, Bob.

Operator

Your final question comes from the line of [Matt Weatherbywith MA Weatherby & Company]. Pleaseproceed.

[Matt Weatherby – MAWeatherby & Company]

Thank you. Like manyon the call, I go back with Financial Federal and it’s predecessor companyCommercial Alliance many years and it seems to me in past tough environmentsthe company always managed to both maintain adequate credit quality and growthe business. What’s been missing in theequation this time around is growth in the business. My question is from what you said Paul, aboutthe improving environment where short term rates are being cut and yourcompetitors are starting to raise their prices, what they need to charge. It sounds like the environment isparticularly favorable to grow your book of business at the present time andwith you being underleveraged relative to virtually any competitor andcertainly relative to your past standards of five and I remember leveragegetting up to 6-6.5 on occasion. Whywouldn’t now be the time to, again, to increase your receivables and acceleratethe growth in your business and use, grow your book value that way rather thanrepurchasing shares?

Paul R. Sinsheimer

That’s the goal Matt. That is the goal.

[Matt Weatherby – MAWeatherby & Company]

So, would you say, I mean, are there any, to a certainextent you’re a prisoner of the asset classes on which you lend and truckinghas been particularly weak. Are there any other, you know, new books ofbusiness, or geographic regions, or asset classes on which you would hope toincrease your business written so as to further diversify your book as well asreaccelerating growth?

Paul R. Sinsheimer

That has always been on the agenda Matt.

[Matt Weatherby – MAWeatherby & Company]

Can you give me any specific examples?

Paul R. Sinsheimer

Yeah, I mean there are other asset classes, you know, thatwe, such as machine tools, we went into and came back out of. There’s aircraft, there’s floating boats ormarine assets, plastics, you know to name a few. But, finding the right set of circumstancesis critical from our perspective as the nature of the asset. It’s finding the people to get involved inthose assets is more important than just the asset itself.

[Matt Weatherby – MAWeatherby & Company]

No, I understand. Arethere any portfolios of loans that you’re being offered, I mean I know you’vehistorically been very careful about acquiring portfolios. But, would you think acquiring a portfolio ofloans from a troubled lender might be an avenue to reaccelerate your growth.

Paul R. Sinsheimer

Oh, absolutely. Infact, you know, prior to us, I’m going back a long time but, prior to us, whenwe were a private company, prior to us going public we bought such a portfoliofrom the RTC. And, it has always beensomething that the company is desirous of doing and I believe that if thingsget as bad as some people are suggesting, those opportunities for us are rightaround the corner. And, I think they’llbe right around the corner this time, as opposed to the recent past because Ibelieve there will be a diminished appetite in the commercial banking sectorwho are in general our competitors to date for these assets as they begin toreassess their own capital allocations and address their own balance sheet andneeds.

[Matt Weatherby – MAWeatherby & Company]

So, with the fed cutting short rates and your competitorsraising their rates and you underleveraged relative to your competition andmaintaining your stringent credit quality, this ought to be a golden period foryou to gain market share on pricing terms that you find acceptable.

Paul R. Sinsheimer

I agree with you. Itcould be a very positive set of circumstances. I view it the same way Matt.

[Matt Weatherby – MAWeatherby & Company]

And could I just ask finally, are there any imperatives fromthe company’s point of view in terms of lack of key sales personnel in thisgeographic region or that? Or, thisparticular asset class or that, that would prevent you from benefiting fromthese more favorable circumstances?

Paul R. Sinsheimer

You know, personnel issues are not different from today thenthey have ever been in the past. Peopleare critical to our business but, there’s nothing jumping off the page at meexcept to say that if we are correct in our assumption in that competition isgoing to be less intense, not as active, people will become available and Icertainly see that as part and parcel to the view you and I currentlyshare. If people become available ascompetitors leave the business and there’ll be additional marketing personneland additional business opportunities. Ithink those are very plausible as we sit here today.

[Matt Weatherby – MAWeatherby & Company]

And, could I just ask one final question. Given the fed is cutting rates and your yieldmay expand as a result of that and the competition is in some disarray, what isit in the company’s thinking that would cause you to not want to increase theleverage up to five or 6-6.5 times?

Paul R. Sinsheimer

Well, the availability of capital on a going forward basisis critical today as it always is. Tothe extent that the institutions who lend to us felt the move was imprudentmight be less willing to lend money on the terms it has in the past. There’s a trade there Matt. It’s a trade that all businesses areconstantly viewing. I can only repeatthat we have a stellar reputation and the asset quality we have is better thananyone else’s and we believe that we remain a good borrower in good standingwith the lending community and they’re tolerant of our views.

[Matt Weatherby – MAWeatherby & Company]

Well great. Thank youvery much.

Paul R. Sinsheimer

Thank you Matt.

Operator

With no further questions in the queue I’d like to turn thecall back over to management for closing remarks.

Paul R. Sinsheimer

Thank all of you for this extended hour longconversation. We look forward tospeaking with you next quarter. Have agood day.

Operator

Thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect and have a good day.

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