Asta Funding (NASDAQ:ASFI) Q4 2013 Earnings Call December 12, 2013 4:00 PM ET
Gary Stern - Chairman of The Board, Chief Executive Officer and President
Robert J. Michel - Chief Financial Officer, Principal Accounting Officer and Secretary
Justin Van Vleck
Good afternoon. My name is Kate, 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 Fiscal Year and Fourth Quarter Periods Ending September 30, 2013. [Operator Instructions] On the call today are 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 moments to read the following statements.
Except for statements of historical facts, all of the statements made during the conference call are forward-looking statements. Although Asta Funding believes that 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 guaranteed and are not (sic) 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 the future portfolio purchases; changes in the credit or capital markets; changes in the interest rates; deterioration in economic conditions; negative press regarding the debt collection industry, which may have a negative impact on debtors' willingness to pay their debts; statements of -- negative impact on the debtors' 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, 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.
Thank you. Good afternoon, everyone, and thank you for joining today's conference call. We are pleased to report a profitable fourth quarter and fiscal year of 2013, in which we reported net income attributable to Asta of $2 million in the fourth quarter of fiscal year 2013, as compared to net income of $1.6 million for the fourth quarter of fiscal year 2012. Net income attributable to Asta was $2.7 million for the fiscal year 2013, as compared to $10 million reported in the fiscal year 2012.
As previously announced, in the fourth quarter of this year, we signed a settlement agreement with the Bank of Montreal, which will save the company approximately $2 million in interest cost annually. I would like to thank Bank of Montreal for their continued support.
Total revenues for the fiscal year ended September 30, 2013, were $42.4 million, as compared to $44.5 million of the prior year, as income from fully amortized portfolios continuous at $33.2 million, as compared to $36.4 million in fiscal year 2012.
We continue to move forward into fiscal year 2014 with a very strong balance sheet, no senior debt and strong cash flow and are well positioned for funding potential investment opportunities without the immediate need for external financing, such as the formation of the new wholly-owned subsidiary in which we provide advocacy services to individuals seeking disability benefits.
We are very excited about the prospects for this group. We will have further information on this unit during the first quarter of fiscal year 2014. We are continuing in our core business, as we did purchase a consumer debt portfolio during the third quarter of this year.
However, in this challenging pricing market and collection environment, we are being very opportunistic at this point. And, as such, we are looking at alternative revenue sources that have the potential to provide attractive returns, such as our disability advocacy company. With regard to our distressed debt portfolios, the face value of the zero basis judgment portfolios is currently $1.3 billion.
As for the personal injury business, we have invested -- an invested balance of approximately $36 million in personal injury claims at September 30, 2013, and recorded $6.6 million in revenue during the fiscal year, as compared to $1.6 million from the prior year.
Our cash and cash equivalent and investments position at September 30, 2013, was $93.2 million, as our cash position remains strong. Overall, although we did record a $12.6 million total impairment for last year, primarily on the Great Seneca portfolio, we are pleased with the results of the fourth quarter and fiscal year 2013 and look forward to taking the momentum built in the fourth quarter into fiscal year 2014.
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, Gary, and good afternoon. For the fourth quarter of fiscal year ended September 30, 2013, we reported net income attributable to Asta Funding of $2,005,000, or 15% per diluted share, an increase as compared to $1,552,000 or $0.12 per diluted share for the fourth quarter of fiscal year 2012.
Net income attributable to Asta Funding was $2,738,000, or $0.21 per diluted share, for the fiscal year ended September 30, 2013, as compared to $10,037,000 or $0.70 per diluted share for fiscal year 2012.
Company reported total revenues for fiscal year 2013 of $42,512,000 (sic) [$42,412,000] as compared to $44,502,000 reported for fiscal year 2012. Total revenues for the fourth quarter ended September 30, 2012, are $9,107,000 as compared to total revenues of $11,022,000 reported for the fourth quarter of fiscal year 2012.
Other income was $8,049,000 for the year ended September 30, 2013, as compared to $3,903,000 for the fiscal year ended September 30, 2012.
Included in other income in fiscal year 2013 is approximately $1.6 million of interest and dividend income and $6.6 million of fee income from Pegasus Funding, LLC, the personal injury funding unit.
At September 30, 2013, we had a net investment of $35,758,000 in personal injury claims. Other income for the fourth quarter of fiscal year 2013 was $1,500,000, as compared to $1,184,000 for the fourth quarter of fiscal year 2012.
Other income in the fourth quarter of fiscal year 2013 was primarily the fee income from the personal injury claims. The fourth quarter 2012 other income included $415,000 of interest and dividends and $648,000 of fee income from personal injury.
Finance income from fully amortized portfolios, or zero basis income, was $33,211,000 for the year ended September 30, 2013, as compared to $36,359,000 for the year ended September 30, 2012.
Zero basis income for the fourth quarter of fiscal year 2013 was $7,389,000 as compared to $8,937,000 for the fourth quarter of fiscal year 2012.
Net cash collections of consumer receivables acquired for liquidation during the fiscal year 2013 was $54,098,000, including $2,448,000 of collections represented by account sales, as compared to net cash collection of $70,019,000, including $117,000 of collections represented by account sales, in 2012.
Net cash collections for consumer receivables acquired for liquidation in the 3 months ended September 30, 2013, were $12,060,000, including $424,000 of collections represented by account sales.
Net collections of consumer receivables were $15,861,000 for the fourth quarter of fiscal year September 30, 2012, including $28,000 of collections represented by account sales.
Net collections on the Great Seneca portfolio were $11,884,000 for the fiscal year 2013, as compared to $12,890,000 reported during fiscal year 2012.
Collections on Great Seneca were $2,895,000 for the fourth quarter of fiscal year 2013, as compared to $3,055,000 collected in the fourth quarter of the prior year.
Carrying value of the Great Seneca portfolio is $43,392,000 at September 30, 2013, as compared to $65,432,000 at September 30, 2012.
General and administrative expenses for the year ended September 30, 2012 (sic) , were $24,212,000, as compared to $23,640,000 during fiscal year ended September 30, 2012. General and administrative expenses were higher, primarily due to the full year effect of Pegasus Funding, LLC, as compared to only 9 months included in the prior year. However, expenses related to the company's consumer debt operation actually declined 16% from the prior year. General and administrative expenses for the fourth quarter of fiscal year 2013 were $6,286,000 as compared to $7,148,000 in the fourth quarter of fiscal year 2012.
Overall, expenses were lower, primarily due to cost containment actions taken in January 2013 that lowered headcount.
Interest expense was at $1,300,000 for the fiscal year ended September 30, 2012 (sic) , as compared to $2,539,000 for fiscal year ended September 30, 2012, a 49% reduction from the prior year.
Bank of Montreal issued a credit to the company towards interest on a nonrecourse debt, yielding a credit of $321,000 for the fourth quarter of fiscal year 2013, and this compares to interest expense of $600,000 for the fourth quarter of fiscal year 2012.
Interest expense is lower as the company continues to pay down the nonrecourse debt, coupled with the settlement agreement signed with the Bank of Montreal in the fourth quarter this year. The agreement significantly reduced the interest rate on the loan, whereby a low rate, as applied to a lower applicable balance, produced a credit for the quarter. In exchange for the lower interest rate and other favorable terms, we paid the Bank of Montreal $15 million upon signing the settlement agreement in August 2013.
We thank the Bank of Montreal for their continued support.
We recorded impairments of $12,592,000 during the fiscal year ended September 30, 2013, of which $10,148,000 was attributable to Great Seneca, as compared to impairments of $1,383,000 recorded in fiscal year ended September 30, 2012. Impairments of $241,000 and $650,000 were recorded in the fourth quarters of fiscal years 2013 and 2012, respectively. Company's book value per share as of September 30, 2013, was $13.07 as compared to $12.96 as of September 30, 2012.
This concludes my remarks on the financial results. I'll turn the call back to Gary.
Thank you, Bob. Now we'd like to take questions.
[Operator Instructions] Our first question comes from the line of Robby Tennenbaum with Alta Fundamental.
This question is for Gary. So it looks like the personal injury business is growing nicely, and I'm sure there's good potential in the disability benefits business. But with your stock around $8.50 and a book value in excess of $13, and that's excluding the value of the zero basis portfolio, it's kind of hard to imagine how anything could have a better return on invested capital than buying back your stock. I mean, said differently, the market appears to be valuing all of your noncash assets at about $17 million. So I was hoping you could shed some light on how you think about the trade-off between maintaining the high cash balance for potential investments, especially in this challenging pricing environment, versus buying back your stock.
Okay. As you know, we did buy a significant amount of stock back about a year -- when was that, Bob? A year...
Robert J. Michel
In March. So we're certainly looking at that. No final decision has been made. And we do value cash, and we like the idea of us having this cash, but we're certainly looking at that as an option. No decision has, obviously, been made yet.
Our next question comes from the line of Justin Van Vleck with Linden Advisors.
Justin Van Vleck
First question, I just wanted to understand -- or make sure I understood the terms of the agreement with BMO. So I thought that the way that the deal was structured now was they essentially reduced the balance to $30 million, and after you made a $15 million prepayment to them, the balance should have been something around $15 million. And then they were going to collect the next $15 million of cash flow from the Seneca portfolio after that. So if that's right, I guess, where I get confused is you still show a balance on the Seneca nonrecourse debt of $36 million. So what am I missing there? What exactly were the terms of the deal?
Robert J. Michel
Thanks for your call. This is Bob Michel. Well, the balance of the loan at June was approximately $15 million higher because the payment came in August. And it got -- it reduced it to the $36 million plus other collections and payments during the quarter. The next $15 million, or approximately $15 million, will go directly to the Bank of Montreal. And we're in the middle of that payment stream right now as once that payment stream is completed, the next $15 million comes back dollar-for-dollar back to Asta. And then, once that $15 million has been returned, we split the collection 70-30, 70 in favor of Asta, 30 in favor -- to Bank of Montreal.
Justin Van Vleck
So they really only have -- or, I guess, they're really only entitled, I guess, if you will, based on the new agreement, to -- since there was $3 million in cash collected from Seneca this quarter, they have -- they're going to have priority on the next $12 million of cash flow. But then after that, the only cash going to BMO is the 30% of any profit split above and beyond that next $15 million, right?
Robert J. Michel
Justin Van Vleck
Okay. So how is the balance, then, still $36 million?
Justin Van Vleck
I guess I'm just confused why the balance on the debt would still be $36 million and not $12 million.
Robert J. Michel
So the balance at the end of June was approximately $50 million, okay? And then we made -- again, round numbers here. Then we made a payment in the beginning of August of $15 million, okay?
[Operator Instructions] And I'm showing we have a follow-up question from the line of Justin Van Vleck with Linden Advisors.
Justin Van Vleck
So I wanted to touch a little bit on how you guys are thinking about the zero basis portfolio at this juncture. So I guess, first, you now have about 5 years of collections on this portfolio of, call it, mid-30s, $35 million or so, in that cash collections. And it looks like that, given the portfolio of judgments actually seemed to tick up relative to the numbers you've disclosed in prior quarters, is there any reason why that number is going to change over the next few years, materially, from the $35 million you guys have had for the past few years? Or is it reasonable to assume that, that $35 million number in cash should probably be a good number to use from a forecasting perspective?
Yes. Look, obviously, we don't have a crystal ball. But logically, the collections should go down. We're very happy that the judgments are where they are. So the good thing I would say about these portfolios are, in zero basis, we have -- it's spread out between 297 different portfolio purchases. So there's a wide diversity of asset, different buys there. So the hope would obviously be that, if this continues at this level or goes up. But logically, that shouldn't happen. So, so far, we're pleased with the level. We don't know what the future will bring, but I can tell you we worked very diligently on these assets and also other assets to find jobs, homes, things of that nature, which probably is part of the reason why the collections have held up. And it's also dependent on the economy, of course, going forward.
Justin Van Vleck
All right, okay. That kind of leads in to my follow-up on that. So this $1.3 billion face value that you have for zero basis receivables with judgment, can you give us a sense for what you actually have, I guess, either from like a lien perspective or wage garnishments? Is -- does 50% of that $1.3 billion of receivables have liens on houses? And then the rest, the other 50% is wage garnishments? Or how should we think about what those receivables actually have judgments on?
We have to get that information for you. We don't have it on the top of our head. But I am confident that the 50% of the accounts are not on wage garnishments. The housing market, I cannot tell you right now. We can go back to our files and look at it. Be aware, we don't foreclose anybody with judgments because of the nature of the housing market and things of that nature. So we can look that up. And we don't have it here, though, right this minute in front of us.
And I'm not showing any further questions at this time. I'd like to turn the call back over to management for closing remarks.
Thank you for participating in our fiscal year and fourth quarter 2013 conference call. As always, should you have any additional questions, please feel free to call Bob or myself. Have a great day.
Thank you for participating in today's teleconference. Have a pleasant day.
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