Financial Federal Corporation F2Q08 (Qtr End 01/31/08) Earnings Call Transcript

Mar. 4.08 | About: First Trust (FIF)

Financial Federal Corporation (NYSE:FIF)

F2Q08 Earnings Call

March 4, 2008, 11:00 am ET

Executives

Paul Sinsheimer – CEO

Steve Groth - CFO

David Hamm – Controller

Analysts

Bob Napoli – Piper Jaffray

Carl Drake – Suntrust Robinson Humphrey

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2008 Financial Federal Corporation Earnings Call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Mr. Paul Sinsheimer, CEO. Please proceed.

Paul Sinsheimer

Good morning. Thank you for attending our earnings conference call for the second quarter ended January 31, ’08. I’m joined by Steve Groth, our CFO; and David Hamm, our Controller.

I will briefly discuss our second quarter results and give an overview of our business trends. I will then ask Steve to give us a few comments. Finally, we will take questions from participants.

Net income for the second quarter ending January 31 was $12,600,000, 2% higher than reported in the second quarter of 2007. Diluted earnings per share were $0.51 for the quarter, one penny higher than last quarter and 11% higher than the second quarter of 2007. The increase in net income for the quarter is largely due to the net effect of lower short-term market interest rates.

Finance receivables were lower from the previous quarter at $2.07 billion. Originations for the quarter were $225 million compared to $259 million last quarter and $284 million in the second quarter of 2007. The yield for the quarter was 9.23%, down from 9.28% last quarter and up from 9.17% in the second quarter of 2007. Cost of debt for the quarter was 5%, down from 5.33% last quarter and 5.36% in the second quarter of fiscal quarter 2007. The net interest margin increase to 5.34% from 5.15% in the last quarter and 5.09% in the second quarter fiscal 2000. Expenses increased to $6.9 million from $6.1 million in the second quarter of 2007 and $6.5 million from last quarter because of higher non-performing asset costs. For the quarter, the expense ratio was 1.30% and the efficiency ratio was 24.3%. This performance resulted in a 12.9% return on equity and a 4.1 debt to equity ratio.

For the first six months of fiscal 2008, net income was $25.3 million, a 3% increase from the same period last year. Diluted earnings per share increased by 10% to a $1.01 from $0.92. Net charge-offs were $0.7 million compared to $0.4 million in the last quarter and net recoveries of $0.1 million in the second quarter of fiscal 2007. The provision for credit losses was $0.8 million compared to $0.4 million recorded last quarter and no provision was recorded in the second quarter of fiscal 2007. Non-accruals were 1.55% of total receivables compared to 0.66% at second quarter and at fiscal 2007. Delinquencies were 1.22% compared to 0.4% and repossessed equipment was 0.27% compared to 0.10%.

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

Steve Groth

Very quickly as we mentioned in the press release, Fitch Ratings affirmed our investment grade rating citing our established industry position, consistent performance, excellent asset quality, prudent leverage and ample liquidity; and liquidity is always critical to us, especially during the market disruptions.

We’ve stated we have over $200 million available through diversified sources. We continue as last (inaudible) the least expensive debt products available to us through this credit market turbulence. Our finance receivables continue to be 92 fixed and 8% floating, while our debt and equity component is 57% fixed and 43% floating. Finally, as mentioned in our press release, the board declared a $0.15 dividend per share quarterly payable on April 10th.

Paul.

Paul Sinsheimer

Our performance this past quarter was outstanding posting a record high earnings per share. There have been no disruptions in our funding despite the current dislocation in the markets. I do not believe that there are many financial services companies out there today that can make these statements.

The transparency of our business model is a key component of our success. We lend money to three basic industries that we know well – Construction, transportation and refuse. We don’t sell these assets. We keep them on our balance sheet. We fund these receivables with a current, with a conservative mix of capital indebt from a diverse group of lenders.

While this strategy is simple and straight forward, it takes discipline to execute. We do not finance subprime mortgages, CDOs, CLOs or have any other exotic assets on our balance sheet. We underwrite all the receivables on our balance sheet. We know our borrowers and they know us. We know our lenders and they know us. Our bank facilities are committed with staggered maturities. We are conservative using financial leverage and have always tried to act responsibly and prudently.

In my opinion, the country entered a recession sometime during the last quarter and as a result new business opportunities slowed dramatically. I believe strongly that Financial Federal will find itself in an improved operating environment with fewer participants when the outcome of these current economic conditions unfold. How long this will take is anyone’s guess.

At this time I’d like to open it for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Bob Napoli with Piper Jaffray. Please proceed.

Bob Napoli – Piper Jaffray

Good morning.

Paul Sinsheimer

Good morning, Bob.

Bob Napoli – Piper Jaffray

Thank you. Good, great results in this environment.

Paul Sinsheimer

Thank you.

Bob Napoli – Piper Jaffray

Question, just first on the ending share count, it looks like you bought back a few more shares. What was the ending share count? How many shares did you buy back, and do you intend to continue to… Your leverage actually went down with limited asset growth opportunities you expect to continue buying.

Paul Sinsheimer

Steve, give me the number.

Steve Groth

Bob, for the quarter, we bought back 210,000 shares for $4.7 million.

Bob Napoli – Piper Jaffray

Okay, and what’s the ending share count?

Steve Groth

Dave, what is the exact number?

David Hamm

Shares outstanding or diluted?

Bob Napoli – Piper Jaffray

You can give that to me. Let me maybe go on. On your…

Steve Groth

We have it, Bob.

Bob Napoli – Piper Jaffray

Okay.

David Hamm

25,467,000 outstanding.

Bob Napoli – Piper Jaffray

Okay. With regards to your debt, I guess, you said 43% floating, but that includes the equity, I think. If you look just look at the debt, it’s 54% about of the debt, somewhere around there.

Paul Sinsheimer

That’s correct. We give both statistics in the Qs.

Bob Napoli – Piper Jaffray

I just wanted… What you don’t give is the benchmark over the… How much of a premium over the various benchmarks? I was hoping you might be able to help me with that. Your bank borrowings are LIBOR-based.

Steve Goth

Bob, the conduits, the unsecured CP and the bank lines are all LIBOR floating based and then we have term notes with….

Bob Napoli – Piper Jaffray

Right, but what premium over LIBOR are you paying so I can understand what your current cost of funds is?

Paul Sinsheimer

Bob, let me take that. It’s competitive and it varies from source-to-source.

Bob Napoli – Piper Jaffray

Around 100 basis points, generally.

Paul Sinsheimer

I certainly hope not. I don’t want to get into specifics but south of 100.

Bob Napoli – Piper Jaffray

That’s very helpful. Then just on the origination side, what are you… I mean is it across the board, I mean refuse I would imagine is stable and are construction and transportation down equally?

Paul Sinsheimer

It’s fairly much across the board. You’re correct, refuse is not, is more stable than the others. But with all the noise that is currently going in the financial markets, Wall Street and in the banking world, our borrowing base is very hesitant and there’re just fewer opportunities right now.

Bob Napoli – Piper Jaffray

Last question, just last cycle, which wasn’t all that long ago, I guess, 2002/2003 in the current cycle, what are the differences on the credit side and do you expect credit to go where it was back then? I mean your MPAs were over 4%; your charge-offs got up close to 1% for one-year. If you can compare it to…

Paul Sinsheimer

It to me is dramatically different this time around because the banks and the lending community weren’t in what appears to be the same level of peril today that excited in 2003, meaning it appears that the banks are having more difficulty today than five years ago and when the banks have problems and they become fearful of lending, the permutations of that are anything you want to make them to be, but they certainly spread out and affect the economy a lot greater. The economies affected a lot more difficultly than when the banks are not in trouble. The other thing that is different is collateral evaluations. Our assets are retaining a much more firmer posture today than they were five years ago; and I’ve spoken to in the past, I think that largely reflects a weak dollar today versus a strong dollar five years ago where foreigners continue to buy construction-based assets and have supported the market valuations. I don’t see that stopping any time soon, but that certainly isn’t a forecast that will continue. It just appears to be continuing.

Bob Napoli – Piper Jaffray

Great. Thank you.

Paul Sinsheimer

Thank you, Bob.

Operator

(Operator Instructions) Our next question comes from the line of Carl Drake with Suntrust Robinson Humphrey. Please proceed.

Carl Drake – Suntrust Robinson Humphrey

Good morning. Thank you. Paul, if you could, it seems like yields held up pretty well this quarter, all things considering. Maybe you could talk about, was there anything in the quarter from a prepayment standpoint, probably not, that propped yields and what does pricing look like on new loans going forward given competition most likely exiting the market?

Paul Sinsheimer

Well first of all, competition hasn’t exited the market, and I’ll say yet. There is certainly a prepayment premium component that exists in your yield and it was meaningful; I don’t want to suggest it was anything out of the normal. We continue… I continue to be befuddled by the banks who have to go out and borrow money and pay something north of 7% and yet find it in their magic elixir to lend it for an amount less than that. I recognize that that’s some unusual arithmetic that I’m sure the market will eventually sort out as not a very profitable way to do business. As a result, we do not intend to chase what little bit there’s out there on irresponsible terms, not only as it relates to rate but as it relates to the underwriting. Eventually the marketplace will get it correct. I’m not sure it has it correct in the short-term.

Carl Drake – Suntrust Robinson Humphrey

It sounds like it’s a little early to be flexing pricing power in the marketplace given the competition and you’re not going to chase that. But do you expect that given that most of your assets are 92% fixed that this yield will hold up relatively near current levels?

Paul Sinsheimer

Well let me say this to you, Carl. If you look back and you saw what happened to us over the last few years, our rates don’t plummet when they start to go down, nor do they rise straight up when they start to go up. As rates come down in the marketplace three or four years ago, the yield in the portfolio decreased but never fell off the cliff. I expect the interest rate on the top line to go down, but not as fast at least in the current term. Our borrowing costs will go down faster because those monies reprice quickly or much quicker.

Carl Drake – Suntrust Robinson Humphrey

Sure.

Paul Sinsheimer

I don’t think our competitors will last long on their current ways of viewing life, but I’ve been wrong before.

Carl Drake – Suntrust Robinson Humphrey

That’s helpful. Second question, Paul, is perhaps the balance sheet contracts a little bit in this environment. Do you plan to use some of that capital to buyback stock; and if so, what type of leverage you think is comfortable in this environment?

Paul Sinsheimer

That’s a great question. I can only tell you that we view it regularly with the Board. The moods that dictate our business decisions changes quickly as the marketplace changes and all I can tell you there, Carl, is we will continue to try to act prudently and responsibly as it relates to that subject.

Carl Drake – Suntrust Robinson Humphrey

You have about, is about $29 million left on the current authorization, does that sound right?

Paul Sinsheimer

I believe that’s pretty close.

Carl Drake – Suntrust Robinson Humphrey

The last question, the trucking segment, I think last quarter you said that the values were holding up relatively well, but expected then to perhaps decline. Are they… How would you characterize the values there, collateral values there in the trucking segment?

Paul Sinsheimer

My recollection is: Trucking values were starting to soften, but they are soft or softer than they were but still on a historical basis are holding up fairly well. How much longer this is going to continue? I don’t know. We’re very pleased that it is continuing because there are higher defaults not only in transportation but construction as well. Notwithstanding those defaults, we are secured lenders and our assets are currently maintaining their historical values and as a result our losses have been mitigated.

Carl Drake – Suntrust Robinson Humphrey

Thank you very much. Good quarter.

Paul Sinsheimer

Thank you, Carl.

Operator

Our next question comes as a follow-up from the line of Bob Napoli, please proceed.

Bob Napoli – Piper Jaffray

Thank you. The 4 to 1 that you’re at right now on a leverage basis, it seems like your access to capital has been pretty much unimpeded. Is 4 to 1 the right number right now? Would you use excess capital above that to continue to buyback stock after you complete the authorization?

Paul Sinsheimer

Bob, we just don’t make forward-looking statements. I understand your question. I will tell you that, the capital markets, as you know as well as I do, that the events are very fluid and circumstances are changing quickly in unexpected directions. We are comfortable the way we have structured our balance sheet and have postured ourselves. We want to retain our flexibility to be opportunistic and we will try to act as we have in the past. We have no preset formulas. We will just act as we believe the conditions in the market dictate. I hate to be as evasive with you, but it’s pretty much consistent with the way we’ve handled that question in the past.

Bob Napoli – Piper Jaffray

Yes, you’re normally evasive answers are consistent anyway.

Paul Sinsheimer

Well thank you. I prefer the word “consistent” there.

Bob Napoli – Piper Jaffray

I mean we can calculate some numbers here, but I was wondering, Steve, if you could tell us what the current net interest margin is, that we’ve had some, obviously some pretty massive rate, Fed rate cuts in January, 150 basis points. I just wondered if you could tell us what that margin…

Steve Groth

Yeah, you can figure out, but I’ll do the math for you. For the second quarter, it was 5.34.

Bob Napoli – Piper Jaffray

Right, and what it is right now, I guess.

Steve Groth

It’s 5.34 as of January 31.

Bob Napoli – Piper Jaffray

Okay, that’s the end of the quarter?

Steve Groth

It’s the average quarter.

Bob Napoli – Piper Jaffray

Right. No, no, I guess what I want is: The Fed cut the rates in January by 150 basis points and I guess I’m trying to get what your current right now…

Steve Groth

Bob, I can’t give you that because you’re asking me for yields on the paper and we haven’t closed a month so that’s impossible to do. You just have to kind of…

Bob Napoli – Piper Jaffray

Yeah, we can get pretty close. I just… Thank you.

Steve Groth

Sorry, I didn’t understand that.

Operator

(Operator Instructions) I show no other questions at this time.

Steve Groth

Operator, let me just make a statement that this call did contain certain forward-looking statements and I refer everyone to our Form 10-K for risks associated with… That was mentioned at the start.

Paul Sinsheimer

If there are no other questions out there, I want to thank everybody and we will look forward to speaking to you in about another 90 days. Have a good day.

Operator

Ladies and gentlemen, this concludes the presentation. You may now disconnect and have a great day.

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