Asta Funding Management Discusses Q3 2013 Results - Earnings Call Transcript

| About: Asta Funding, (ASFI)
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Asta Funding (NASDAQ:ASFI) Q3 2013 Earnings Call August 9, 2013 11:00 AM ET

Executives

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

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

Analysts

Nathaniel Hall August - Mangrove Partners

John Eric Deysher - Bertolet Capital Trust - Pinnacle Value Fund

Operator

Good day. My name is Eric, 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 3- and 9-month periods ended June 30, 2013 of the fiscal year ended September 30, 2013. [Operator Instructions]

On the call today is Mr. Gary Stern, Chairman and Chief Executive Officer; and Mr. Bob Michel, Chief Financial Officer.

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

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

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

Factors that 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 impact 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, 2012 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

Good morning, everyone, and thank you for joining today's conference call. Today, in addition to the results of the third quarter and the 9 months period ending June 30, 2013, we are now seeing a couple of events that will position Asta very well into the future.

Although we did report a loss in the quarter of approximately $2.7 million, we remain profitable for the 9-month period ended June 30, 2013, with a net profit of approximately $733,000. Included in the results for the 9-month period ended June 30, 2013 is an impairment of approximately $10.2 million recorded on the great Seneca portfolio. Although we continue to put every effort into working this portfolio and recent collections have remained steady, our prospective view is that collections may weaken over time, and we have taken the steps to write the portfolio down to its net realizable value, which, at June 30, 2013, is approximately $46 million.

As we continue to work the great Seneca portfolio, we have announced today that we have further revised the receivables financing agreement with the Bank of Montreal, the facility that finances the Great Seneca portfolio, which should put us in a good position moving forward. I would like to thank the Bank of Montreal for working with us on this latest revision. Bob will cover the details of the new agreement in his commentary.

In addition, we purchased a consumer debt portfolio with a face value of approximately $53 million at a cost of approximately $3.3 million. Although not sizeable in terms of dollar value, it is an important step as we invested in the consumer debt portfolio for the first time in several years. We continue to be very pleased with the results of the 0 basis income as we report income from 0 basis of $9.8 million and $25.8 million, respectively, for the 3- and 9-month periods in fiscal year 2013 as compared to $9.6 million and $27.4 million in the same prior-year periods.

As we move into the last quarter of fiscal year 2013, we have a very strong balance sheet, no senior subordinated debt, strong cash flow and are well positioned for additional investment opportunities in the financial services sector, including our core business of distressed debt.

Our cash and securities position at June 30, 2013 was $105.3 million. And as of today, we still have approximately $94.8 million of cash and securities. This includes the recent $15 million payment made to the Bank of Montreal as part of the facility revision.

Overall, we are pleased with the results of the recent activities of the third quarter and the results through the 9-month period ending June 30, 2013. Steps taken in the quarter put us in a very strong position moving forward.

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

Robert J. Michel

Thank you, and good morning, everyone. For the third quarter of fiscal 2013, we reported a net loss of $2,737,000 or $0.21 per diluted share as compared to reported net income of $3,048,000 or $0.22 per diluted share for the third quarter of fiscal 2012.

For the 9-month period ended June 30, 2013, we reported net income of $733,000 or $0.06 per diluted share as compared to $8,485,000 or $0.58 per diluted share.

Included in the current third quarter and 9-month results is a write-down of approximately $10.2 million on the Great Seneca portfolio. As Gary mentioned, while collections on the Great Seneca portfolio have been steady recently, we do see signs of weakness in the future and have taken the prudent steps to write the Great Seneca portfolio down to estimated net realizable value.

The company reported total revenues for the third quarter of fiscal year 2013 of $12,668,000, an improvement over total revenues reported in the third quarter of fiscal year 2012 of $11,571,000. Included in the total fiscal year 2013 revenues is approximately $1.6 million of revenue generated on approximately $2 million of account sales.

Although we have had limited debt portfolio purchase over the last several years, the quality of the legacy portfolio is evidenced by the level of zero basis income of $9,750,000 reported in the third quarter of fiscal year 2013, an increase from $9,592,000 reported in the third quarter of fiscal year 2012.

Total revenues for the 9 months ended June 30, 2013 were $33,305,000, just slightly below the $33,480,000 we reported for the 9-month period ended June 30, 2012. Zero basis income for the 9-month period ended June 30, 2013 was $25,822,000 as compared to $27,422,000 we reported for the 9 months ended June 30, 2012.

Our investment in personal injury claims joint venture Pegasus Funding, LLC was approximately $32 million at June 30, 2013. The Pegasus Funding purchase interest and personal injury claims for claimants who are party to personal injury litigation with the expectation of a settlement in the future.

Fee income from Pegasus Funding, LLC in the third quarter of fiscal year 2013 was $2,287,000 as compared to $509,000 in the third quarter of fiscal year 2012.

Fee income from Pegasus Funding, LLC was $4,921,000 for the 9-month period June 30, 2013 as compared to $999,000 for the same period of the prior year. The increase is primarily due to the growth of the unit, as we invested an additional $13 million in personal injury claims during the 9-month period ended June 30, 2013.

Net collections of receivables acquired for liquidation, including cash collection representing account sales during the third quarter of fiscal 2013, were $15,425,000 as compared to $18,475,000 in the third quarter of fiscal year 2012.

Net collections of receivables acquired for liquidation, including account sales, were $42,038,000 for the 9-month period ended June 30, 2013 as compared to $54,158,000 for the same period of the prior year.

Included in the net collections in the 3-month and 9-month periods ended June 30, 2013 is approximately $2 million of account sales. Net collections on the Great Seneca portfolio were $3,348,000 in the third quarter of fiscal year 2013 as compared to $3,721,000 in the third quarter of fiscal year 2012.

Net collections on the Great Seneca portfolio for the 9-month period ended June 30, 2013 were $8,989,000 as compared to $9,835,000 for the 9 months ended June 30, 2012. Carrying value of the Great Seneca portfolio at June 30, 2013 was $46,294,000, which includes the write-down of approximately $10.2 million.

General and administrative expenses for the third quarter of fiscal year 2013 were $6,545,000 as compared to $5,694,000 for the third quarter ended June 30, 2012. The increase in general and administrative expense is primarily related to the growth of the Pegasus Funding, LLC. General and administrative expenses for the consumer debt portion of the business decreased $700,000 or 14.2% in the 3-month period ended June 30, 2013 as compared to the 3-month period of the prior year.

General and administrative expenses for the 9 months ended June 30, 2013 were $17,926,000 as compared to $16,492,000 for the 9-month period ended June 30, 2012. General and administrative expenses increased during the period, primarily due to the growth of Pegasus funding, LLC.

General and administrative expenses for the consumer debt portion of the business decreased $1.9 million or 12.3% for the 9-month period ended June 30, 2013 as compared to the 9-month period ended June 30, 2012.

Interest expense was $518,000 during the third quarter of fiscal year 2013 as compared to $619,000 for the fiscal year ended 2012. Interest expense was $1,621,000 for the 9-month period ended 2013 -- June 30, 2013, excuse me, as compared to $1,939,000 from the same period a year ago.

We continue to pay down the non-recourse debt to the Bank of Montreal with the loan balance at June 30 being $54,250,000. As Gary previously mentioned, we entered into a new settlement agreement with Bank of Montreal, which will significantly reduce our minimum monthly collection requirements and also lower our annual interest rate that will significantly lower interest expense for the company. With the initial $15 million payment, the current balance on the non-recourse debt is approximately $38 million.

We have also reduced -- have reduced covenant commitments on the facility. With the new arrangement at the Bank of Montreal, we have the opportunity to reduce our future commitment on this facility and have significant savings on interest cost of the company. I would also like to thank Bank of Montreal for working with us on this new agreement.

An impairment of $10.2 million was recorded in the third quarter of year 2013 on the Great Seneca portfolio. Although we have collections recently remain steady, the new projections developed in the third quarter show a weakening trend, and we took the step to write the portfolio down to its net estimated realizable value. There are impairments of $49,000 and $733,000 recorded in the 3- and 9-month period of the prior year.

As Gary previously mentioned, we have approximately $95 million in cash and securities, and this takes into consideration the $15 million payment to the Bank of Montreal. The company's book value per share at June 30, 2012 was $12.96.

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

Gary Stern

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

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Nathaniel August from Mangrove.

Nathaniel Hall August - Mangrove Partners

I'd like to make sure that I understand correctly the way that the deal with BMO works. And my understanding is that you paid $15 million. Now the next $12 million of cash, because of the $3 million offset that comes out of the portfolio goes to BMO, you then get the $15 million that comes out after that. And then, after that, all proceeds are split 70-30, 70 to you and 30 to BMO? Or is it different than that?

Robert J. Michel

Yes, that's correct.

Nathaniel Hall August - Mangrove Partners

So we should basically look at the realizable value then that you've written this portfolio down to, subtract $27 million out of that, multiply it by 70 and then add $15 million to get, sort of, the net value to you that you expect to get?

Robert J. Michel

Well, keep in mind, there are judgments that are in the portfolio, and there are -- the projections for the portfolio have been analyzed, and that's -- the $46 million is our net realizable value. If you do the math on that, that is -- it could be estimated that way.

Nathaniel Hall August - Mangrove Partners

But out of the $46 million, $27 million we know how that's getting split. And that leaves $19 million. You expect to get 70% of that, which will be $13.3 million plus the $15 million you put in originally. So the return of $28.3 million on an investment of $15 million? Am I getting that right, or is there something wrong there?

Robert J. Michel

I have to follow up with you on how you're going about that.

Nathaniel Hall August - Mangrove Partners

Okay. If we can follow up offline, that would be great.

Operator

Our next question comes from John Deysher of Pinnacle.

John Eric Deysher - Bertolet Capital Trust - Pinnacle Value Fund

I was just curious on the Pegasus expense line. Year-to-date, the Pegasus expenses -- the G&A expenses look like they're about $3.3 million. Do I have that number correct?

Robert J. Michel

Yes.

John Eric Deysher - Bertolet Capital Trust - Pinnacle Value Fund

Okay. And the associated revenue is $4.9 million, which you, I believe, disclosed in the release?

Robert J. Michel

Correct.

John Eric Deysher - Bertolet Capital Trust - Pinnacle Value Fund

So pretax year-to-date, Pegasus has generated approximately $1.6 million of pre-tax income?

Robert J. Michel

Correct.

John Eric Deysher - Bertolet Capital Trust - Pinnacle Value Fund

Okay. That looks like -- based on your average levels of investment, it looks like it's about an 8.5% return pretax. Is that about right?

Robert J. Michel

Doing the pure math, yes.

John Eric Deysher - Bertolet Capital Trust - Pinnacle Value Fund

Okay. But is there any other way to do it?

Robert J. Michel

No, it's just -- that's the way the math works on the results.

John Eric Deysher - Bertolet Capital Trust - Pinnacle Value Fund

Okay. Fair enough. One final question on the Bank of Montreal. Is the maturity of that debt still April 2014 then?

Robert J. Michel

No. This is a new agreement.

John Eric Deysher - Bertolet Capital Trust - Pinnacle Value Fund

Okay. I didn't see it in the release. Have you disclosed what the new maturity is?

Robert J. Michel

Well, it's based on the remaining collections.

John Eric Deysher - Bertolet Capital Trust - Pinnacle Value Fund

Okay. So there's no fixed maturity?

Robert J. Michel

No fix maturity.

Operator

And I am showing no further questions.

Gary Stern

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

Operator

Thank you.

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